Index is best equity manager

PASSIVE WINS: TOP FUNDS TRACK THE JSE TOP 40

The Naspers influence, however, has become immense.

Up until the start of June this year, the JSE was basically flat over the last three years. South African equity fund managers had very little to cheer them up over this period.

However, since hitting a bottom on June 6, the All Share Index has climbed over 13% and is now trading at record highs.

The funds that have benefitted the most from this short-term surge are those tracking momentum indices.

These essentially include

stocks that are showing the biggest positive short-term price movements. In sharp market upturns, they can therefore capture some very quick, very large gains.

Looking over the slightly longer term, however, the top funds so far this year have been those tracking the FTSE/JSE Top 40 Index. As the table above shows, only one active manager is ahead of a pack of passive funds.

This performance from Top 40

trackers should not, however, be seen so much as a case for passive over active, as what can happen when one stock dominates an index. Naspers is currently around 21% of the Top 40, which means that its influence is immense.

The media giant has gained 59% this year, which accounts for easily the bulk of the gains in the Top 40. Active managers will almost inevitably underperform this index over a period like this

Source: Morningstar as it is very difficult, and arguably not prudent, for any of them to take such a large position in a single company.

This has become one of the biggest criticisms of local index funds. They are exposing investors

to very high single stock risk.

Investors need to carefully consider their exposure to local index funds. Clearly they have done exceptionally well, but the argument for diversification is becoming increasingly strong.