Four myths about passive investing
Investments in passive strategies are gaining traction locally and growth is expected to accelerate as new regulations take effect, but there are still a few myths about these investments.
Passive product providers who participated in a panel discussion at the Money Expo had this to say:
Myth 1: passive investing is a completely passive exercise
CEO of Satrix Helena Conradie said investing in passive strategies isn’t a 100% passive exercise. Some financial advisors argue that if they allocate clients’ money to passive strategies, they’ll merely track market movements.
She argued there are many decisions investors must make before deciding which index, funds or vehicles to use. It’s also important to consider where a passive investment fits in the portfolio.
It’s a myth that a passive investment will result in average returns and that investors are throwing money at the market – various options exist, including international options, smart beta funds and balanced funds.
Myth 2: active managers can outperform in a down market
Kingsley Williams, Old Mutual Customised Solutions CIO for indexation, said active managers often argue that they’d be able to protect investors in a down market but in reality, this often doesn’t happen.
During the 2008 financial crisis, a significant percentage of local active managers underperformed the SWIX Index, which most institutional investors use as a benchmark, he added.
Myth 3: passive strategies only work in developed markets
CoreShares MD Gareth Stobie said it’s a myth that passive investing only works in the US.
The S&P Indices Versus Active Scorecard, which compares the performance of active managers against a broad market benchmark, shows that SA active managers don’t generally do better than their counterparts in developed markets, Stobie said.
Around 72% of SA active equity managers failed to beat the S&P benchmark last year and almost 77% over a five-year period.
Myth 4: you must choose either a passive or active strategy
There are advantages to blending these strategies, Conradie said.
Jannie Leach, Nedgroup Investments head of core investments, said around 90% of its clients use both active and passive strategies.