Passive investing
Recent local market developments have given active managers in SA reason to argue that investors are better off in actively-managed portfolios than in passive ones.
The first issue is Naspers: it now makes up 19% of the FTSE/JSE All Share Index and 23% of the Top 40 and SWIX. Investing in any of these indices therefore means taking on much single-stock risk.
Following Steinhoff’s share price collapse, many active managers have said that when building portfolios, it’s important to pick the right stocks. If you’re investing in an index, however, you just buy whatever’s in it – no matter its valuation or risks.
Any astute investor should take these arguments seriously. However, it would be wrong to use them to conclude passive management in SA doesn’t work. Conversely, investing in a broad market index will still leave investors better off than investing with mostly local active managers.
“In every market that is very active, people say ‘our market is different’. But it’s not like active managers are doing better in this market that they claim is so different,” says S&P Dow Jones Indices CEO Alex Matturri.
“The benchmark reflects the market place, and active managers will do better or worse based on their stock selection. Regardless of whether there is a lot of concentration, a manager can do better or worse by being underweight or overweighting different securities. If they’re right, they will be adding value,” Matturri says.
However, it has become increasingly difficult for managers to be right in any market of significant size.
“There are a lot of reasons why markets have become more efficient and less value is added by active managers. The sophistication of markets means that adding value through research is harder to do. That’s not to say that there aren’t going to be good active managers. But for any manager to consistently outperform is hard.”
One thing the best active mangers definitely do is manage risk better than a vanilla market cap index fund. That’s why combining active and passive strategies can produce the best risk-adjusted returns.