IN­DEX FUNDS GET­TING SMARTER

Weekend Argus (Saturday Edition) - - FRONT PAGE -

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.

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