Betting on active managers doesn’t pay

By 10X - Partner Content

By Steven Nathan, Chief Executive Officer, 10X Investments

Billionaire investor Warren Buffett wagered $1 million that an S&P500 stock index fund would outperform a basket of hedge funds over the course of a decade. Buffett had long been a vocal critic of hedge funds (and asset managers in general), holding that the industry’s exorbitant fees were not justified by their funds’ performances.

The bet took effect on 1 January 2008, the very same day that 10X Investments offered a similar challenge to local fund managers when it launched a unique multi-asset index fund in South Africa. It was a contest that pitted a buy and hold strategy against market timing, index funds against stock picking, and low cost against high cost.

Except that the ante is much higher than a million dollars – over a trillion rand in retirement savings are at stake. This money could conceivably earn a much higher return by choosing the strategy with the better outcome.

For Buffett, 10 years was the appropriate period to make his point on hedge funds. This also seems a fitting timeframe to draw the first worthwhile conclusions on the ‘active versus passive’ debate in the local balanced fund market.

For the record, Buffett won his bet long before the clock ran down. By 31 December 2017, the S&P500 index had returned 7.1% compounded annually, whereas the basket of hedge funds selected by the asset manager taking on the bet – Protégé Partners – returned an average of just 2.2%.

To put that performance gap into perspective, “dumbly” tracking the S&P500 return would have delivered 60% more money than entrusting it to arguably some of the smartest investment minds around.  

Admittedly, hedge funds pursue different objectives to beating the market, and the S&P500 is not their benchmark. The outcome was always heavily dependent on the economic backdrop, which, as it turned out, provided strong tail winds for the US equities market. However, even if the funds had met specific risk objectives it would still not justify their excessive fees.

In that regard, the challenge posed by 10X Investments is much fairer as all participants pursue the same objective, which is to maximise the long-term return within the constraints of Regulation 28 and their investment mandate.

Now that the 10X High Equity Fund has established a 10-year track record, we can also call that bet. Using the monthly returns in the Alexander Forbes Large Manager Watch (LMW) as a reference (Global – Best Investment View Category), the 10X fund’s annualised return of 11.3% over the decade is 0.8% above the large fund manager average before fees, and 1.9% above the large fund manager average after fees.

Over 10 years, that performance gap translates to 21% more money on a lump sum investment.  

Net of the estimated fee impact, just one of the 14 portfolios in the survey (that lasted the full distance) outperformed the 10X portfolio, and then only by 0.3% pa. This number is dwarfed by the 3.5% shortfall of the worst performer. On a 10-year lump-sum investment, those investors would now have 27% less money than they could have had with a simple, no frills, market tracking solution.

Active managers sometimes ridicule index investing as “settling for average”. Based on these results, we wager that most retirement fund members would, with hindsight, happily settle for that.

To apply for your retirement annuity through 10X, click here for more information. 

 

Recent Articles

Featured 32% of South Africans do not have a bank account – here’s why

A recent survey focussed on the growth of South African customers who bank with the ‘big five’, but it also pointed out that nearly 32% of South Africans don’t have a bank account at all.

Read more

Sassa recipients strike gold as new card is unveiled

The South African Social Security Agency (Sassa) recently launched a new gold card which boasts not just new features, but benefits as well.

 

Read more

How to protect yourself in an internship

Most employers abide by regulations and ensure their interns are taken care of. They create a supportive learning environment to help their interns kick off their careers. But not all interns are this lucky; some are taken advantage of, and others are neglected. This week we found out more about internships so that you can protect yourself by being informed.  

Read more

New features added to FNB banking app

Last week First National Bank (FNB) launched nav» Money, a new feature within its banking app which will allow clients to better monitor their finances.  

Read more

Sign Up

To our weekly newsletter for advice you can bank on

Deals

KFC Tuesday Special

Price: R50
When: Tuesdays
Where: KFC

Pick n Pay Take 5 Promo

Price: Unspecified
When: 18- 24 June
Where: Spar

Taj Hotel Deal

Price: R2445
When: 24 -25June
Where: Taj Hotel Cape Town