INDEX FUNDS GETTING SMARTER

IN THE the investment industry, the performance of the markets, which can be replicated in a passive fund, is known as beta. Any performance above beta that can be attributed to the skills of a fund manager is known as alpha.

The passive space has expanded to include multi-asset funds and so-called smart-beta funds.

Elize Botha, the managing director of Old Mutual Unit Trusts, says there are several balanced passive funds in our market. “They are created from building blocks made up of indices across asset classes, such as the FTSE/JSE Capped Shareholder Weighted All Share Index, the All Bond Index, the FTSE/JSE Listed Property Index and the MSCI World Index. These multi-asset index funds may also be regulation 28-compliant* and provide a compelling option for retirement funding by offering diversification with lower fees,” Botha says.

Indices themselves are becoming more sophisticated, and there are indices that reflect investment styles used by active managers, such as value (reasonably priced shares that offer good value), growth (shares of fast-growing companies), quality (shares of well-managed, quality companies) and momentum (shares whose prices are showing upward momentum).

In a further development, multi-factor indices combine single-factor indices such as those mentioned above, providing better diversification and lower risk. A reason for active managers to be quaking in their boots (see “Active managers still have the edge over robots and algorithms”, below)?

*Regulation 28 of the Pension Funds Act requires retirement funds to stay within specified assetallocation limits.