ing Government’s call for more passive investing. In my opinion, rather than offering an “interesting counterargument”, the Sanlam article conjectures a market scenario that is misleading and lacks factual basis.
Indexing has dominated US investment f lows for the last 10 years and is now a sizable portion of their invested assets. There is no evidence that this tremendous shift has given rise to any of the concerns raised by Sanlam, i.e. it has not undermined price discovery, reduced market liquidity or impeded capital raising. There are, and always will be, suff icient speculators hoping to profit from any mispricing.
This should not be the objective of retirement savers, however. Their objective must be to pursue their savings goal at the lowest possible risk. This means avoiding the risk of selecting an underperforming fund manager and losing an excessive share of their return to fees.
The merits of passive over active investing – as recognised by the National Treasury – are simple and unambiguous. The bottom line: investing is a zero sum game. The total excess (above average) market return (‘alpha’) available to all investors is exactly zero. That holds true for every asset class in every market. It does not matter how efficient those markets are, or how small, or how concen- trated – the aggregate alpha available to all investors is always zero. On average, investors earn just the market return – before fees. The less that investors pay away in fees, the higher their net return; on average, therefore, low(er) cost passive investing trumps high(er) cost active investing. Some active managers do outperform, but results prove that less than 20% of funds do so consistently and that there is no reliable way to pick those funds ahead of time.
The local investment industry – including Sanlam – is well aware of the arithmetical and empirical evidence underpinning passive investing. But the ‘active versus passive’ debate is a useful red herring that def lects from the many of the other harmful industry practices criticised by National Treasury. These include high active management fees, investment choice, excessive complexity, poor disclosure, investment advice, marketing timing, switching and other goaldefeating habits.
These practices do not improve the market return; rather, they improve the industry’s return at the expense of the investor’s return. That is the real issue at hand: reforming the retirement fund industry so that it serves the needs of investors rather than service providers.
Chief Executive, 10X Investments