Financial Mail - Investors Monthly
OPTIONS OPEN
Investors can use exchange traded funds as well as unit trusts for this way of investing
“Contemporary industry innovation is now emerging from those who embrace digital and industry 4.0 technologies
Continual innovation in the passive investment sector has served as a prolific growth driver for this market segment.
For instance, linked investment service providers (LISP) have simplified investment administration for advisers and made it easier for them to deliver a broad range of solutions for their clients.
LISPs have also made it easier to change client investment strategies to more passive investments.
“Many investors now obtain access to passive investments through LISP platforms,” says Kingsley Williams, chief investment officer at Satrix.
This was historically limited to unit trusts. However, some platforms have developed solutions that enable investors to use exchange traded funds (ETFs) as well.
“ETFs open up interesting opportunities for investors who would like to become more active and look for opportunities. But those who take a buyand-hold approach through a LISP platform need to decide between a unit trust and an ETF, as they have unique features and benefits,” Williams says. He says ETFs have lower transaction costs than unit trusts as the investment manager doesn’t need to pay cash to purchase shares.
“When end investors buy ETFs, they typically trade with a market maker or other market participants who already have ETF shares from the issuer. This limits cash flows in and out of the ETF and so, on a like-for-like basis in terms of index tracking, ETFs may offer cost-saving benefits over unit trusts to investors.”
More contemporary industry innovation is now emerging from fund managers and administrators who embrace digital and industry 4.0 technologies.
Through outcomes-based investment solutions that blend digital platforms and roboadvice with passive investment vehicles, providers are delivering risk-adjusted returns.
These technologies also lower barriers to entry and broaden inclusivity.
Grant Locke, head of Outvest, explains that the company leverages passive rules-based indexing by means of unit trusts in order to simplify retail investing. “Unit trusts offer the ideal vehicle from a cost and complexity perspective, and help us keep track of performance drivers in the portfolio,” Locke says.
Outvest chooses to use market cap-weighted indices to provide a predictable framework that delivers a greater degree of certainty, to help clients achieve their objectives, and prefer selected unit trusts over ETFs mainly due to the complexities that arise during rebalancing.
“It is hard to replicate the model within ETFs with small balances, due to the trading costs, the churn in portfolios and the capital gains tax implications,” says Locke.
“There is no tax problem when rebalancing unit trusts, which we do biannually.” he explains.
Using automated algorithmic robo-advice and planning, the platform provides investors with access to a range of passive exposures through various asset classes and subset investments to achieve their desired outcome with the greatest degree of certainty.
This approach is yielding results. Locke says: “Among clients who have reached their investment horizon and who invested according to their personalised investment plan, 79% have achieved 95% or more of their target.”
Passive investments done by means of the Outvest platform cover everything from short-term funds for liquidity to 100% exposure to equities. This is useful for retail investors, most of whom who probably require a range of risks in their portfolios.
Locke says: “We use rulesbased portfolio construction through a modelling engine to create graduations, from money market through to equities. Asset allocations are programmed into calibrations to create four indices, or rules, using one unit trust per client goal to maintain consistency.”
For example, the moderate fund has a higher-risk profile than the stable fund, which carries more risk than the cautious fund.
“Creating rules that cover the spectrum of a multi-asset portfolio caters for client needs over time and helps investors achieve their goals.”
Outvest’s latest innovation is a disruptive fee model. It has been introduced on all its investment products in 2020.
“When a portfolio reaches R300,000, investors incur a flat effective annual cost of R4,500, a year, which remains fixed until their investment hits R2.25m.
“Thereafter, investors are charged 0.2%.”
This is in contrast to the traditional investment fee model, which is typically billed as a percentage of total assets under management and includes various layers of cost, including asset management, adviser and platform fees.
By making the process repeatable and controlled, with easy, user-friendly access through a digital platform, providers can achieve the economies of scale and cost efficiencies that characterise the passive investment value proposition. ●