Nicolette Dirk, finance writer, Justmoney.co.za
Passively managed funds have traditionally been viewed as the less risky fund that comes with fairly low fees.
Actively managed funds have been the option for investors hungry to beat the market average.
But according to Steven Nathan, chief executive officer of 10X Investments, research is proving that it is simply not possible for most funds to outperform the market.
Is it possible to outperform the market?
The State Street Corporation (listed on the New York Stock Exchange) Centre for Applied Research report - The Quest for Performance - found that only 1% of institutional investors were able to beat performance benchmarks once costs were deducted. The research analysed investment decisions made by university endowments, global pension funds, as well as sovereign wealth funds.
Louis van der Merwe, certified financial planner at Wealthup said that the context for investment in the US is different than in South Africa because of the market size.
“In America there is a bigger market and most of the performance of the funds is displayed. And most of these funds perform well,” said Van der Merwe.
For this reason you won’t necessarily get as big a return when you invest in an otherwise riskier actively managed fund.
Where do most South Africans invest?
“The vast majority of South African retirement funds are invested in actively managed funds with the expectation - or hope - of earning a market-beating return.
This higher or excess return is called “alpha” and South African retirement investors pay at least 1% per annum in extra investment fees for alpha,” said Nathan.
He added that private sector retirement fund assets equal around R1.5 trillion (R1 500 billion), so the quest for alpha costs retirement savers around R15 billion every year.
“Investors and trustees seem willing to pay the extra R15 billion, yet few understand what alpha is and how much of it is out there for all investors to share. This is how the industry wants it,” said Nathan.
According to Nathan competing for alpha – trying to beat the index – is a zero sum game because for every fund that buys a winning share, another fund must sell that winning share. In aggregate, the winners and losers cancel each other out to equal the market return.
“The fund management industry (including consultants) has managed to build a R15 billion per annum industry. It is a brilliant marketing feat, matched only by the success of bottled water.
The industry perpetuates this myth by promoting the few winning funds while ignoring the underperforming funds, which is where the majority of savers are invested,” said Nathan.
Are all passively managed funds the safer option?
Van Der Merwe said that with an exchange traded fund like Satrix you are able to buy a basket of shares (not actively traded, at a low cost) but there are also risks you should be aware of.
According to Wealthup, the Satrix Investment Plan starts with a 0.75% per annum administration fee on amounts below R100 000 for administration costs. The company also charges between 0.46% and 0.53% per annum depending on the fund.
“Your total cost may easily reach more than 1%, which should still be below active managed funds, but is surely not the best priced funds in the market,” said Van der Merwe.
According to Van Der Merwe the Sanlam Investment Management’s equally weighted top 40 index fund is a good option. This is a pure equity fund which tracks the performance of the FTSE/JSE Equally Weighted Top 40 index.
“The appeal is the .50% cost which is a good price and a good base for any investor,” said Van der Merwe.