Be­hind ac­tive man­age­ment

Most ac­tive fund man­agers won’t beat the re­turns of pas­sive funds. What mat­ters is in­vest­ing now rather than wast­ing time to find a great man­ager

CityPress - - Business -

An in­vestor who wants to in­vest in the JSE via an in­vest­ment fund has two main op­tions: us­ing an ac­tive fund-man­age­ment com­pany, usu­ally in the form of a unit trust, or what is com­monly known as a pas­sive fund. These are usu­ally ex­change­traded funds or unit trust tracker funds. A pas­sive fund sim­ply tracks the av­er­age re­turn of the mar­ket. It does this by track­ing spe­cific in­dices such as the FTSE/JSE All-Share In­dex or the JSE Top 40. Ex­po­sure to shares in that in­dex is usu­ally based on the size of the com­pany, with a higher weight­ing to larger com­pa­nies. You can never hope to out­per­form the mar­ket in this type of fund, and should re­ceive a re­turn slightly less than the av­er­age re­turn af­ter fees have been de­ducted.

An ac­tively man­aged fund, run by big house­hold names such as Allan Gray, Investec or Coro­na­tion for ex­am­ple, em­ploys pro­fes­sional port­fo­lio man­agers who spend their days re­search­ing all the com­pa­nies on the JSE and de­cid­ing which com­pa­nies make for the best in­vest­ments. For this ser­vice, they charge a man­age­ment fee and of­ten a per­for­mance fee over and above that. As a re­sult, they are more ex­pen­sive than pas­sive funds.

The idea is that, with this skill, they will be able to de­liver re­turns in ex­cess of the av­er­age re­turn from the stock mar­ket, thereby jus­ti­fy­ing their fees.

The prob­lem is that re­search is in­di­cat­ing that ac­tive fund man­agers are not de­liv­er­ing on their prom­ises de­spite, or per­haps be­cause of, their fees.

Re­search con­ducted by the S&P Dow Jones In­dices found that, last year, 84% of South Africa’s ac­tively man­aged in­vest­ment funds un­der­per­formed their bench­marks, which are usu­ally a spec­i­fied in­dex.

The Spiva SA Score­card was launched by the S&P Dow Jones In­dices to mea­sure the per­for­mance of ac­tively man­aged South African funds against their re­spec­tive bench­mark in­dices over one-, three- and five-year pe­ri­ods.

The re­sults raise ques­tions about whether in­vestors are get­ting their money’s worth by spend­ing money on ex­pen­sive ac­tive man­age­ment.

As much as 84% un­der­per­formed their bench­mark last year and, over a five-year pe­riod, it was slightly worse: 85% of do­mes­tic eq­uity funds un­der­per­formed and 97% of global funds trailed their re­spec­tive bench­marks.

Fig­ures from in­vest­ment-anal­y­sis com­pany Morn­ingstar Di­rect showed that even when fees were re­moved, 74% of South African ac­tive fund man­agers un­der­per­formed the in­dex over a 10-year pe­riod. This means that even if they were charg­ing you no fees, they still did not match the per­for­mance of the FTSE/JSE All-Share In­dex. They were clearly mak­ing bad in­vest­ment de­ci­sions.

Sa­trix Balancea

Investec Op­portp­nity Fpna

Stan­liR Balancea Sym­me­try


Oa­sis Balancea Av­er­age fpna per­for­mance El­e­ment Flex­iRle

(Fraters) the best funds in their cat­e­gory based on the awards.

Ten years later, the RMB High Tide Fund no longer ex­isted and the Oa­sis Bal­anced Fund and Fraters Flex­i­ble (now El­e­ment Flex­i­ble) un­der­per­formed the av­er­age of all the funds in its cat­e­gory.

The Sa­trix Bal­anced Fund is in ef­fect a bal­anced in­dex tracker and would rep­re­sent a good bench­mark for ac­tively man­aged funds. As the Sa­trix Bal­anced Fund was not open in 2005, sim­u­lat­ing the in­dex pro­vides in­sight into how such a pas­sive in­vest­ment would have com­pared. When do­ing this, it’s clear the Sa­trix Bal­anced Fund would have out­per­formed the award-win­ning ac­tive funds.

Of all the funds awarded a Rag­ing Bull in 2005, the Investec Op­por­tu­ni­ties Fund per­formed best, and four of the funds did con­tinue to per­form above the av­er­age of other fund man­agers, although not the sim­u­lated Sa­trix fund. The Sa­trix Bal­anced Fund out­per­formed all the award-win­ning ac­tive funds, although the point must be made that this was a sim­u­lated in­dex and may not have used the same reg­u­la­tory con­straints that were ap­pli­ca­ble to the funds against which it is com­pared.

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