It will take time for pure index funds to make a mark in SA
• Satrix has room to grow, while Sygnia’s institutional client base is two-thirds active
Will investment house 10X continue to be such a strong proponent of the pure index approach? Former CEO Steven Nathan is not only an admirer of US index pioneer Vanguard, in some ways he saw himself as the second coming of its founder, Jack Bogle.
Bogle’s theme was that the magic of compounding returns is overwhelmed by the tyranny of compounding costs. Exactly the theme of 10X’s Back to the Future TV commercials starring comedian Nik Rabinowitz.
10X doesn’t even offer exchange traded funds (ETFs) — index funds which, like shares, are traded and priced throughout the day. Bogle called this a wolf in sheep’s clothing as its main purpose is to facilitate trading in its shares. They are too often used for short-term speculation, he believed. That didn’t stop Vanguard becoming a huge player in ETFs once Bogle surrendered day-to-day control.
Another target for Bogle’s puritanical approach was SmartBeta funds, which have always struck me as a good convergence of the active and passive approaches, from the days I was exposed to the Rob Arnott Fundamental index. This weighs the shares on the market by economic footprint, not market cap. Yet Bogle brought out all his guns to attack these. You can read the full chapter in his Little Book of Common Sense Investing.
The subtitle is the somewhat sarcastic Index funds that promise to beat the market. Bogle says value or momentum managers charge higher fees, which are not performance-based; they are not index managers but active strategists; they engage in data mining and focus heavily on factors that have worked in the past. Bogle argues that the past is not a prologue.
No surprise then that 10X has no SmartBeta funds. In contrast, rival Sygnia has several SmartBeta funds that might be considered flavour of the month, such as the 4th Industrial Revolution Fund and the Faang Plus Equity Fund. These have a scary resemblance to the now defunct Investec Wired Index Fund, which included then hot shares such as Enron, which experienced a spectacular downfall.
The 10X team could launch a pure equity fund to gather assets. But if it wants traction it needs to move away from its proprietary index, which covers the Top 60 shares.
As Alexander Forbes head of investments, products & enablement John Anderson puts it, there is already a substantial divergence in performance between the three main indices in the SA market — the all share index, the Swix (shareholder weighted index, which aims to exclude foreign holdings) and the Capped Swix (which aims to cap at 10% of the index). The relative holdings in Naspers and Prosus have been the main reason for the divergence.
It probably isn’t yet time for a pure index business in SA commercially. Satrix has room to grow at its own pace in the belly of owner Sanlam. Even Sygnia’s
institutional client base is twothirds active and just one third in its pure passive Skeleton range. And in opposition the marketing budgets at shops such as Allan Gray and Coronation remain formidable.
Over five years the Satrix All Share outperformed 80% of funds in the general equity sector, even though many of its competitors took advantage of their right to hold 30% of their assets offshore.
There is a lot to be said for the core/satellite approach, with a cheap index fund surrounded by maybe a 20% allocation to managers with a distinctive style that could outperform. Years ago I remember Tony Gibson, one of the founders of Coronation, telling me that he expected a
split between cheap passive products and genuinely active managers, at a time that the SA equity market was dominated by tame index huggers who never strayed far.
I was surprised to hear that Dave Fraser, portfolio manager of the Peregrine hedge funds, calls himself a big fan of index funds. Unless a manager can prove it can outperform the
index consistently it is just as well to save money and put your money in index funds, he believes. The Peregrine High Growth hedge fund has proved that it can outperform in the long term, producing more than double the return of the JSE every year with few exceptions.
The great investor Warren Buffett has long been a supporter of index funds for the average investor. Buffett says his holding company, Berkshire Hathaway, is not an appropriate vehicle for the average saver as it has proved to be extremely volatile.
Index funds have a role to play, which can only grow in SA.
VALUE MANAGERS CHARGE HIGH, NOT PERFORMANCEBASED FEES; THEY ARE ACTIVE STRATEGISTS RATHER THAN INDEX MANAGERS
THE CORE/SATELLITE APPROACH IS A CHEAP INDEX FUND CIRCLED BY MAYBE A 20% ALLOCATION TO MANAGERS WITH A DISTINCTIVE STYLE