Financial Mail - Investors Monthly
SPECIAL FEATURE
Passive vs Index Tracker Funds
In SA, digital platforms empower investors to adopt a DIY approach when constructing passive portfolios, as purchasing unit trusts is simple and cost-effective
Tech advancements have played a key role in crafting the passive investment market’s low-cost value proposition.
Specifically, back-end system developments have significantly reduced a fund manager’s administrative and regulatory compliance burdens, and these efficiencies are passed on to the investor in the form of reduced fees.
Sylvester Kgatla, head of Absa Fund Managers, says: “Technology creates enormous efficiencies in areas such as tax liability calculations and tax compliance when administrating a unit trust, provided the system is up to date with current tax laws and that the necessary tax compliance checks are effectively performed on each transaction.”
However, back-end digitisation no longer offers a competitive advantage as this functionality is now an industry standard. The battle for market dominance has shifted to the front office, particularly among passive investment providers.
In this regard, unit trusts have held an advantage in the local market over ETFs due to the sector’s first-mover advantage in digital platform development, with myriad mobile and web-based platforms available to retail investors offering easy and convenient access to unit trusts.
Platforms also allow
investors to gain direct access to passive investments, which can create cost efficiencies for those with the acumen and experience to make their own investment decisions.
“In SA, digital platforms empower investors to adopt a DIY approach when constructing passive portfolios, as purchasing unit trusts is simple and cost-effective,” adds Kgatla. “However, more complex portfolios still require input from a financial adviser as most of the DIY digital tools in the market remain simplistic to appeal to the man in the street.”
These benefits and features have given unit trusts a slight market edge because ETF investors required a share trading account to access these funds, or were limited to ETFs only, reducing the range of investment strategies available.
“Historically, it was easier for retail investors to access unit trusts due to the ‘last mile’ distribution infrastructure that exists via mobile and webbased platforms,” says Kingsley Williams, chief investment officer at Satrix. “With the transfer agent costs built into unit trusts, the fees are generally higher compared to an ETF, but certain investors are willing to make the trade-off due to the convenience and to forgo the costs and complexity incurred outside of the fund when trading through a brokerage.”
But this market dynamic is shifting as LISP platforms (linked investment services providers) come online to offer ETFs. Most recently, Glacier added five Satrix ETFs to its platform. This market innovation makes it one of only a few platforms in SA to offer investors access to unit trusts and ETFs without the need for a brokerage account.
While the range of ETFs available is limited relative to the size of the more established direct unit trust platform channel, it is a key move that will create parity in terms of access between these two popular passive investment options.
“Technology has effectively made ETF investments accessible to anyone who wants to invest,” says Phillip Thuthuka Dube, head of equity finance at Investec. “People can gain exposure to a range of ETFs via a simple process where they select their preferred fund from a list and specify the amount they want debited directly off their account each month. It’s ideal for those looking to invest in a passive instrument that grows over time, without the need for active portfolio management.”
And with a lower total expense ratio (TER) compared to unit trusts, this platform play creates a strong value proposition for ETFs among pricesensitive investors.
The only caveat is that investors who access ETFs via a LISP platform cannot perform intra-day trades, says Williams.
“This was a key differentiator between these two passive investment options, as trade in unit trusts can only happen once a day. As such, this option wouldn’t appeal to ETF investors who look to take advantage of intra-day price movements.“
But with all else equal in terms of fund composition, regulatory framework — both investment types are governed under the Collective Investment Schemes Control Act — and now, direct access via platforms, costs and fees are set to become a more compelling market differentiator.
“While price-sensitive investors may find that the weighted average TER is lower for ETFs than unit trusts, the choice of which is best would depend on their individual needs,” says Williams. “The crux of the matter is that it is easier than ever for investors to access a broad spectrum of passive investments to construct portfolios that align with their objectives.”