Riding out the storm
In turbulent times, index trackers are one strategy for preserving wealth — but they’re no silver bullet, writes Johann Barnard
I n an unusually uncertain world, are index trackers the answer to investors’ concerns about protecting their wealth? The short answer is “no”; the slightly more involved response is “maybe”.
The first answer is “no” because index trackers do exactly what their name suggests — they track an index. So if the basket of shares in that index falls, so do the investor’s returns. Also, index trackers are a manifestation of the passive investment philosophy that, in itself, is no silver bullet for dodging a market crash.
The “maybe” answer is valid if investments into these trackers are part of a diversified portfolio that is balanced to protect you against exposure to a single asset class or market.
What strengthens the argument is the growing ease with which SA investors can access offshore markets through globally focused funds. This has increased enormously as online platforms have launched and it has become easier to invest in these types of funds with traditional managers.
However, ease of access does prompt investment advisers and fund managers to remind us that particular investment strategies, chosen asset classes or risk profiles differ from person to person.
But the growing number and nature of index trackers do offer a credible way to achieve some diversification. And investors can do so at costs that are considerably lower and more attractive than we’ve become accustomed to.
Exchange traded funds (ETFs) are an especially popular way to buy into an index tracker, though unit trusts offer similar benefits and ability.
“The default answer always is to be well diversified in times like this,” says CoreShares MD Gareth Stobie. “As to whether you want to tactically asset-allocate because of how you see politics playing out, that is a difficult call to make.
“Where passive [investing] does make life easier is, for instance, in two global products we launched late last year that trade on our local market in rand and are easy to access. So if you’re taking a bearish view on the rand and want to get dollar exposure you can buy our S&P 500 fund and get all the diversification that brings.”
Zack Bezuidenhoudt, head of S&P Dow Jones Indices for SA and sub-Saharan Africa, supports this view of passive products such as ETFs opening doors that were previously closed to SA retail investors.
“We’re working with a number of fund managers looking to roll out ETFs and unit trusts linked to global indices,” he says. “A number of asset managers are rolling out new products, especially passive, global products, so we’ll probably see these hitting the market in the next three to six months.”
Apart from offering clear and simple diversification, Bezuidenhoudt says the lower cost structure of ETFs adds an extra sparkle for investors in a low-return environment.
“What we saw in the Spiva [S&P Indices Versus Active] report is that, in this low-return environment, the majority of active managers underperform the benchmark because investors pay about half of their return in fees.”
Bezuidenhoudt suggests that investors take the time to understand the various indices better and use this knowledge when finding index trackers.
He says one of the benefits of passive funds is the limited choice they offer. This allows investors to get a better understanding of the available indices so they can choose those that will help them achieve their investment goals.
If nothing else, index trackers are useful because they offer investors choice in sectors that are generally easy to understand.
As the industry has matured, we’ve also seen more intelligent products appear on the market that offer the same cost and index tracking benefits, but in a non-vanilla fashion.
Kingsley Williams, chief investment officer of indexation capability at Old Mutual Customised Solutions, says this is best illustrated through smart beta funds such as the Rafi 40 Index Fund and Global FTSE Rafi All World Index Feeder Fund.
“Those funds were designed to not invest in stocks that have run hard recently and that are trading at exorbitant multiples,” he says. “An index fund like Rafi will tend to be underweight in those expensive stocks. So, if you want to be more defensive with your investment approach, those index-based solutions offer a great alternative.”
The upshot of this approach is that while the smart beta strategy is an index fund with all its associated benefits, it amounts to an active strategy relative to the conventional market-cap index approach.
In the context of investors’ concerns about preserving wealth, index trackers appear to make sense as one of the basket of investments or strategies that can be applied. But a silver bullet they are not. One of the biggest advantages is the ability to gain broad offshore exposure in a time when domestic conditions are especially uncertain.
A number of asset managers are rolling out new products, especially passive, global products