Pas­sive so­lu­tions: More tools in the in­vest­ing tool­box BY BERNARD FICK

Finweek English Edition - - FUND FOCUS -

ICEO of Pru­den­tial In­vest­ment Man­agers nde x t r a c k i ng or “pa s s i v e ” i n v e s t ment s h a v e b e c o me in­creas­ingly pop­u­lar in the US and other de­vel­oped mar­kets over the past decade and are also gain­ing ground in South Africa.

Ac­cord­ing to global i nvest­ment group Black­Rock, ap­prox­i­mately 25% of all US as­sets un­der man­age­ment are now man­aged pas­sively, com­pared to 13% in 2004, while in Europe about 11% is pas­sively man­aged as op­posed to only 4% a decade ago.

In South Africa, while the ex­act num­ber is not known, the f ig­ure is much lower – ap­prox­i­mately R124bn is in­vested in ex­change-traded funds (ETFs), most of which track in­dices, com­pared to over R1.7tr in unit trusts

that are mainly ac­tively man­aged.

CEO OF PRU­DEN­TIAL IN­VEST­MENT MAN­AGERS In­dex track­ing funds aim to pro­duce re­turns that are in line with the av­er­age re­turn of a mar­ket in­dex, such as the FTSE/JSE All Share In­dex (Alsi). They sim­ply buy all of the un­der­ly­ing shares in the in­dex ac­cord­ing to the in­dex weight­ing, and use au­to­mated trad­ing pro­grammes to regularly re-weight the port­fo­lio, re­flect­ing the price move­ments of the shares over time. It is im­por­tant to point out that ac­tual in­vestor re­turns in an in­dex tracker must, by def­i­ni­tion, be lower than the in­dex re­turns due to trad­ing and ad­min­is­tra­tive costs, plus man­age­ment fees. Track­ing er­ror also plays a role. If a pas­sive fund tracks an in­dex based on mar­ket cap­i­tal­i­sa­tion, it buys more ex­po­sure to t he l argest and most ex­pen­sive com­pa­nies in the in­dex as prices rise, and sells as prices fall. This ap­proach is con­sid­ered fun­da­men­tally f lawed by val­u­a­tion-based in­vestors like Pru­den­tial, which fo­cus on buy­ing those com­pa­nies of­fer­ing the best value.

Pas­sive prod­uct providers have c on­se­quent l y de v e l oped a wide va­ri­ety of funds that can track more so­phis­ti­cated bench­marks. These are of­ten de­scribed as “smart beta” or “en­hanced in­dex­a­tion” prod­ucts, since they aim to pro­vide a way of beat­ing the mar­ket cap­i­tal­i­sa­tion in­dex.

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