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Four myths about passive investing

Industry commentators share their views.

While investments in passive strategies are slowly but surely gaining traction in the local market and growth is expected to accelerate as new regulations – notably the Retail Distribution Review – take effect, there are still quite a few myths about these investments.

Passive product providers who participated in a panel discussion at the Money Expo, tried to debunk some of these myths:

Myth 1: Passive investing is a completely passive exercise

Helena Conradie, CEO of Satrix, said investing in passive strategies was not a 100% passive exercise. Some financial advisors argued that if they allocated clients’ money to passive strategies, they would merely track market movements.

She argued that there were many decisions investors had to make before they decided which index, funds or vehicles they wanted to use. It was also important to consider where a passive investment fitted in the overall portfolio.

It was a myth that a passive investment would result in average returns and that investors were merely throwing money at the market – various options exist, including international options, smart beta funds and balanced funds, she said.

Myth 2: All active managers can outperform in a down market

Kingsley Williams, chief investment officer for indexation at Old Mutual Customised Solutions, said active managers often made the argument that they would be able to protect investors in a down market, but in reality this often doesn’t happen.

During the financial crisis of 2008, a significant percentage of local active managers underperformed the SWIX Index, which most institutional investors use as a benchmark, he added.

Myth 3: Passive strategies only work in developed markets

Gareth Stobie, managing director at CoreShares, said it was a myth that passive investing only worked in the US and nowhere else.

The S&P Indices Versus Active (Spiva) Scorecard, which compared the performance of active managers against a broad market benchmark, showed that active managers in South Africa did not generally do better than their counterparts in developed markets, Stobie said.

Around 72% of South African active equity managers failed to beat the S&P benchmark last year, and almost 77% over a five-year period.

Myth 4: Investors have to choose either a passive or active strategy

It is also a myth that investors had to choose between an active and passive strategy. There were advantages to blending these strategies in a portfolio, Conradie added.

Jannie Leach, head of core investments at Nedgroup Investments, said around 90% of their clients used both active and passive strategies in their portfolios.

While the conversation about including passive products in client portfolios was previously a difficult one, this has changed quite substantially, Leach said.

These days, financial advisors are more interested in the most appropriate allocation to passive products and which products they had to use, he said.

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And so the debate goes on ad nauseam about active versus passive. There is always a need for active management but at least with ETF you probably only have to be active every 2 weeks

So what are our best and cheapest options for passive investment in SA? Who gives the most competitive rates?

By rates, do you mean fees? New ETFs and index UTs coming out often know, with lower pricing, competition is great

ABSA ETF only account, 0.2% comm with R20 minimum, go to absastockbrokers website to find out more, very easy to use although not perfect from a technical point of view it does tick all the boxes with regards to price.

Most competitive in fees: take a look at Ashburton, Sygnia and ABSA.

You really hit the sweet spot when you trade “passive investment” actively. The appropriate ETF gives you the diversification you need at a low cost, all you need is to get your position sizing, stop-loss, exit and timing right, and you are on your way to beating the market by a mile. The so-called passive investment is simply a handy tool in the toolbox of the active trader.

Couple of rhetoric questions: 1) If 77% of Active managers under-performed the index, what percentage of index trackers under-performed the index over the same period?
2) If the Index is a zero cost calculation and buy and selling shares in the market incurs trading cost, as a market group what should the expectations be in terms of outperforming the index. It can’t be 50% outperform and 50% under-perform. That is only possible if there is no trading cost. So if 77% of active managers under-perform the index and 100% of index funds. Is that not a realistic representations of the mathematical reality of the market? Can one create mass from nothing, can one move an object with no friction. Is our expectations based on fantasy or reality?

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