Deploying broad market products in portfolios brings peace of mind
Replicating the performance indices in your portfolio
Anyone that has witnessed the absolute determination and focus with which a top class boxer undertakes a title fight, might have identified a characteristic that is not often associated with the world of investment products: persistency. You’ll undoubtedly see a demonstration on 2 May (in the Floyd Mayweather jun vs Manny Pacquiao fight).
So let me explain what I mean. We, as the financial media, widely report on the performance of indices like the All Share, Top 40, Resources index etc, etc. With the development of exchange traded products (ETPs) you can now replicate the performance of most of these indices in your portfolio.
The effectiveness of doing this — as opposed to using a conventional fund manager (like Allan Gray or Coronation) has been demonstrated by comparing the performance of the ETP against funds in the same category over a suitably long time period (usually a minimum of three years is acceptable when comparing funds that have an equity component).
Having done this exercise numerous times, I have observed there have always been actively managed funds that have beaten the index. But I have observed funds beating an index/ETF over one period — say three years — are not necessarily the same funds beating the index over other periods. So the question became, how many funds beat an index over all (applicable) periods? The accompanying table helps explain the answer.
The table compares all funds in the general equity classification to the performance of the Swix index. The Swix index is very similar to the Top 40 index, and in many cases is used as a benchmark by the fund managers in the general equity classification. You can buy an ETP that replicates the performance of the Swix index from any one of Satrix, Stanlib, ABSA or Investec.
Row 1 reveals a story in and of itself. The number of funds in the category has exploded over the last few years as more and more asset managers have come to market. This reveals just how competitive the industry has become. Row 2 shows the number of funds that beat the Swix index over each period. Looking at this row, you might fancy your chances of identifying the ones that could continue to beat the index over long periods.
But Row 3 is where it all comes to a point: were the funds beating the index in one period the same ones beating the index over another? The short answer is, no. While 28 funds beat the index over one year, only 12 of those also beat the index over three years. Over all four periods in this analysis, only one fund beat the index over all periods.
So it’s about persistency and, peace of mind. The market that investment managers find themselves in is so competitive that it is extremely difficult for them (after fees) to beat the index over sustained periods.
But for users of ETPs, the ease and peace of mind that can be achieved in deploying broad market products in their portfolios simply cannot be ignored.
There have always been actively managed funds that have beaten the index