Actively managed funds gain in favour
A strategy often employed internationally for pension funds is to invest the core of the portfolio into passive or tracker funds, and the balance into satellite actively-managed funds.
However, Natalie Phillips, head of SA Institutional at Investec Asset Management, does not agree with this approach, particularly in the South African market at this time.
“We would suggest a reverse of this strategy, with the core of the portfolio in good actively managed funds and passive funds in a satellite role. In the South African context, investors’ patience would have been well rewarded had they followed this route, as good active funds have delivered better capital growth than simply investing in the index.”
In a low return environment, she says it is tempting to choose passive investments to save fees.
“However, it is in just such an environment that alpha — outperformance above the index — is at its most valuable, and opportunities for alpha are at their greatest due to higher return dispersion.”
She points to evidence from local multi-asset active managers with a track record of outperforming a multiasset benchmark over the long term.
Furthermore, Phillips says active management is a way of ensuring efficient capital allocation, as asset managers invest capital where they believe it will be most productive.
Phillips points out that a risk to note with passive investing is that it results in buying yesterday’s winners.
“In a highly concentrated market like the JSE, it can result in high exposure to shares or sectors when their valuations are stretched. In 2008, for example, resources made up 59.4% of the ALSI 40 at a time when mining shares were trading at high multiples on peak earnings.”
She says it is becoming critical to add investment strategies such as private debt, where returns are uncorrelated to equity. She says liquid markets also provide a more speedy return profile, which is positive in the face of the uncertain and volatile markets.
“If you look at the unlisted credit space, be it in infrastructure or corporate credit, you can achieve a return of inflation plus 5%.
“I think one really has to be mindful of how inflation-plus is going to be achieved for members and retirement funds by allocating to diversified sources of returns. The offshore theme is pretty much played out, because most funds are at their full off-shore allocation.
“While there is renewed interest in hedge funds, they need to be offered at reasonable fees, have a proven track record and offer a differentiated return signature.
“Lastly, it is important to be selective in one’s South African equity selection, because of the downside risk as a result of the volatility we see in the market.”
Phillips believes active managers with a well-resourced team and a disciplined, robust and repeatable process outperform the market and passive managers over the long term.