Op­por­tu­nity beck­ons for bet­ter re­turns at lower cost

Al­though in­vestors of­ten pre­fer ac­tive fund man­age­ment, tracker funds can act as a rea­son­able proxy for most con­ven­tional mar­kets, en­abling in­vestors to ex­tract the eq­uity risk pre­mium.

Finweek English Edition - - Fundfocus - By Leon Kok

the bot­tom line in any in­vest­ment is how it per­forms for you, the in­vestor, and that per­for­mance in­cludes con­sid­er­a­tion of all fees and ex­penses. With a heav­ily loaded fund, you start your in­vest­ment with a sig­nif­i­cant loss. Avoid un­nec­es­sary charges when­ever pos­si­ble.

A low cost-ef­fi­cient Reg­u­la­tion 28 (pen­sion com­pli­ant) tracker fund of­fer­ing high longterm growth and wor­thy of con­sid­er­a­tion is the Old Mu­tual Core Di­ver­si­fied Fund man­aged by Cape Town-based Frank Sibiya of Old Mu­tual In­vest­ment Group.

Co-port­fo­lio man­agers are Shariefa Parker and Bernisha Lala.

In­dex­ing, of course, has be­come a ma­jor force in fi­nan­cial mar­kets since John Bogle, founder of the US-based Van­guard Group, launched the world’s first eq­uity in­dex fund in 1976.

It seems barely con­ceiv­able now that it nearly failed at birth, rais­ing just $11m at its ini­tial pub­lic of­fer­ing in­stead of its $150m tar­get. But, since then, tracker in­vest­ment strate­gies based on in­dices have spread to ev­ery as­set class amid grow­ing recog­ni­tion that ac­tive man­agers too of­ten fail to de­liver on their prom­ises to beat a bench­mark.

The shift to­wards in­dex­ing is a world­wide phe­nom­e­non, says Sibiya, who is re­spon­si­ble for man­ag­ing both lo­cal and international tracker funds at Old Mu­tual In­vest­ment Group. “Tracker funds are a sen­si­ble al­ter­na­tive to ac­tive in­vest­ing, of­fer­ing sev­eral im­por­tant ben­e­fits to in­vestors. It’s a big mis­con­cep­tion that, be­cause mar­kets are not ef­fi­cient, you need an ac­tive man­ager to cap­i­talise on the op­por­tu­ni­ties pre­sented.

“True, in­vestor pref­er­ence is gen­er­ally for ac­tive funds, but it’s been con­clu­sively demon­strated in most cap­i­tal mar­kets world­wide that ac­tive man­agers on ag­gre­gate don’t pro­vide con­sis­tently su­pe­rior re­turns to the in­dices they aim to beat.”

Tracker funds can act as a rea­son­able proxy for most con­ven­tional mar­kets, en­abling in­vestors to ex­tract the eq­uity risk pre­mium, he says. “Balanced funds in par­tic­u­lar pro­vide wide di­ver­si­fi­ca­tion through­out the mar­ket sec­tors. They also keep trad­ing and other costs down, which of­ten erode re­turns gen­er­ated by fund man­agers who trans­act very ac­tively.”

Sibiya con­cedes that ac­tive man­agers re­search shares and re­spond to new in­for­ma­tion such as earn­ings an­nounce­ments, lead­ing to share prices mov­ing in re­sponse to them.

But equally, he points out, re­search pub­lished last year by Bank of Amer­ica Mer­rill Lynch found that US firms ranked in the top-fifth per­centile of En­vi­ron­ment, So­cial and Gov­er­nance Rat­ings (ESG) be­tween 2005 and 2010, ex­pe­ri­enced the low­est lev­els of volatil­ity earn­ings per share in that fiveyear pe­riod. By con­trast, com­pa­nies which ranked the worst in terms of their ESG rat­ing ex­pe­ri­enced the high­est lev­els of volatil­ity.

“In line with these find­ings, the anal­y­sis of ESG char­ac­ter­is­tics to an­tic­i­pate fu­ture volatil­ity lends it­self strongly to in­dex in­vest­ing, par­tic­u­larly among in­vestors who are manda­tory hold­ers of the in­dex. In­dex­a­tion man­agers, how­ever, need to en­sure that their hold­ings ad­here to the prin­ci­ples of re­spon­si­ble in­vest­ment, as they are un­able to take an ac­tive ap­proach to hold­ing cer­tain com­pa­nies.” Old Mu­tual Core Di­ver­si­fied Fund man­ager

The Old Mu­tual Core Di­ver­si­fied Fund is a pas­sive fund with an un­der­ly­ing R240m cap­i­tal­i­sa­tion, ex­posed pri­mar­ily to the JSE Capped Share­holder In­dex (Capped Swix) which is a fair re­flec­tion of the in­vest­ment uni­verse avail­able to the South African in­vestor. The Capped Swix has a 52% strate­gic weight­ing in the fund.

The prin­ci­pal eq­uity hold­ings at present com­prise Naspers* 3.3%, Growth­point Prop­er­ties 1.9%, Sa­sol 1.8%, Stan­dard Bank Group 1.6%, and Re­de­fine Prop­er­ties 1.4%. In ad­di­tion to the broad lo­cal eq­uity mar­ket ex­po­sure, the fund has ex­po­sure to SA listed prop­erty which has a strate­gic weight of 6%.

The international eq­uity ex­po­sure is in­vested in the MSCI ACWI ESG In­dex, with a strate­gic weight­ing of 20%. It of­fers ex­po­sure to both de­vel­oped and emerg­ing mar­kets glob­ally.

Di­ver­si­fi­ca­tion away from eq­ui­ties com­prises ex­po­sure to nom­i­nal bonds via the JSE All Bond In­dex (ALBI), with a 7% strate­gic weight­ing and JSE IGOV In­dex (in­fla­tion-linked bonds) of 6%.

An­nu­alised fund per­for­mance at end-July was 5.4% over three years and 4.9% since in­cep­tion. This was largely in line with the bench­mark. The fund boasts 53.7% pos­i­tive months since in­cep­tion and a max­i­mum draw­down of 5%. ■

*fin­week is a pub­li­ca­tion of Me­dia24, a sub­sidiary of Naspers.

Frank Sibiya

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