De­ploy­ing broad mar­ket prod­ucts in port­fo­lios brings peace of mind

Financial Mail - Investors Monthly - - Contents - WAR­REN DICK fol­low War­ren on Twit­ter @War­ren—Dick

Repli­cat­ing the per­for­mance in­dices in your port­fo­lio

Any­one that has wit­nessed the ab­so­lute de­ter­mi­na­tion and fo­cus with which a top class boxer un­der­takes a ti­tle fight, might have iden­ti­fied a char­ac­ter­is­tic that is not of­ten as­so­ci­ated with the world of in­vest­ment prod­ucts: per­sis­tency. You’ll un­doubt­edly see a demon­stra­tion on 2 May (in the Floyd May­weather jun vs Manny Pac­quiao fight).

So let me ex­plain what I mean. We, as the fi­nan­cial me­dia, widely re­port on the per­for­mance of in­dices like the All Share, Top 40, Re­sources in­dex etc, etc. With the devel­op­ment of ex­change traded prod­ucts (ETPs) you can now repli­cate the per­for­mance of most of th­ese in­dices in your port­fo­lio.

The ef­fec­tive­ness of do­ing this — as op­posed to us­ing a con­ven­tional fund manager (like Al­lan Gray or Coro­na­tion) has been demon­strated by com­par­ing the per­for­mance of the ETP against funds in the same cat­e­gory over a suit­ably long time pe­riod (usu­ally a min­i­mum of three years is ac­cept­able when com­par­ing funds that have an eq­uity com­po­nent).

Hav­ing done this ex­er­cise nu­mer­ous times, I have ob­served there have al­ways been ac­tively man­aged funds that have beaten the in­dex. But I have ob­served funds beat­ing an in­dex/ETF over one pe­riod — say three years — are not nec­es­sar­ily the same funds beat­ing the in­dex over other pe­ri­ods. So the ques­tion be­came, how many funds beat an in­dex over all (ap­pli­ca­ble) pe­ri­ods? The ac­com­pa­ny­ing ta­ble helps ex­plain the an­swer.

The ta­ble com­pares all funds in the gen­eral eq­uity clas­si­fi­ca­tion to the per­for­mance of the Swix in­dex. The Swix in­dex is very sim­i­lar to the Top 40 in­dex, and in many cases is used as a bench­mark by the fund man­agers in the gen­eral eq­uity clas­si­fi­ca­tion. You can buy an ETP that repli­cates the per­for­mance of the Swix in­dex from any one of Sa­trix, Stan­lib, ABSA or In­vestec.

Row 1 re­veals a story in and of it­self. The num­ber of funds in the cat­e­gory has ex­ploded over the last few years as more and more as­set man­agers have come to mar­ket. This re­veals just how com­pet­i­tive the in­dus­try has be­come. Row 2 shows the num­ber of funds that beat the Swix in­dex over each pe­riod. Look­ing at this row, you might fancy your chances of iden­ti­fy­ing the ones that could con­tinue to beat the in­dex over long pe­ri­ods.

But Row 3 is where it all comes to a point: were the funds beat­ing the in­dex in one pe­riod the same ones beat­ing the in­dex over an­other? The short an­swer is, no. While 28 funds beat the in­dex over one year, only 12 of those also beat the in­dex over three years. Over all four pe­ri­ods in this anal­y­sis, only one fund beat the in­dex over all pe­ri­ods.

So it’s about per­sis­tency and, peace of mind. The mar­ket that in­vest­ment man­agers find them­selves in is so com­pet­i­tive that it is ex­tremely dif­fi­cult for them (af­ter fees) to beat the in­dex over sus­tained pe­ri­ods.

But for users of ETPs, the ease and peace of mind that can be achieved in de­ploy­ing broad mar­ket prod­ucts in their port­fo­lios sim­ply can­not be ig­nored.

There have al­ways been ac­tively man­aged funds that have beaten the in­dex

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