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Could passive balanced funds rescue local investors?

Passive balanced funds are benefiting from two trends playing out at the moment.

Passive balanced funds are in an interesting space as they benefit from two broad trends playing out in the retail investment market. Firstly, they are benefitting from the trend towards passive investments. Statistics show that global investors are now investing more in passive funds than active funds, particularly in the US.

Local investors have also increasingly turned to passive investments. Secondly, these funds are benefitting from the trend towards multi-asset funds, as investors have come to embrace the principle of diversification. Multi-asset funds (those which invest in a number of asset classes such as equities, bonds, cash and property – local and offshore) have grown from 24% of industry assets a decade ago to half of industry assets today.

Some passive product providers will have you believe that fees are the only thing that matters in investing. If you can reduce the fee that you pay then your returns will increase proportionally over time. An analysis of the performance of passive balanced funds allows us to park the fee debate and examine the relative performance. The graph below shows the performance of five passive balanced funds, which have at least a three-year track record.

The first observation over this period is that ALL these funds have outperformed the sector average. This reinforces the importance of fees in a low return environment. It is also a bit of an indictment on active managers who really should be delivering in these difficult markets as this is their value proposition. Balanced mandates give these managers sufficient space to showcase their skills, and justify the premium pricing.

The second observation is that there is a meaningful difference in performance between the best-performing fund over the period; Satrix Balanced, and the worst-performing fund; 10X High Equity. Satrix outperformed 10X by more than 2.50% per annum over the period, which is significantly higher than the fee differential between these funds. Satrix’s total investment charge is around 0.23% higher than that of 10X.

Key performance differentiators are the asset allocation strategy and the underlying indices, which these funds track. The table below shows the asset allocation of these funds as at December 31, 2018. Surprisingly Satrix and 10X have the highest equity exposures (local and offshore combined) but have performed the best and worst respectively. So investors have to dig a bit deeper when deciding which fund to use. Or do they?

The asset allocation of the funds raises a number of interesting issues. It seems as if they have been slow to respond to the higher offshore allocation that balanced funds are allowed. This was increased from 25% to 30% in last year’s budget. Prescient has a 3% exposure to alternatives although there is no such exposure included in the fund’s composite benchmark. That appears to be something of an active call although not much information is available in the fund’s MDD. 

A performance review of those passive balanced funds with longer than a five year track record shows that these funds have managed to perform comfortably in the top half of the sector. This outperformance is a lot more pronounced over the longer measurement period. There are only three funds with more than a five-year track record, although the Prescient Balanced fund will pick up a five-year performance from May.

Satrix Balanced barely holds onto its top performing status with all the funds having lagged and led the pack at various stages over the period. This suggests that the spread in performance seen in the three-year review may in fact be temporary.

The growth in passive, multi-asset funds is likely to continue gaining traction in future. We expect this to become a much bigger part of the market especially if relative performance continues as per the last five years. Traditional active managers such as Absa, Alexander Forbes, Old Mutual and Stanlib are entering the space with their offerings. It will be interesting to see if they get the pricing right as this is a key factor for investors.

This growth is also likely to increase the pressure on active managers to up their game and lower their fees, especially if the outperformance persists. This is positive for long suffering investors who have been increasingly voicing their displeasure at investment results over the last three years. This frustration is compounded by managers charging performance fees for delivering less negative returns than the sector. These factors combine to increase the appeal of cheap passive balanced funds going forward. Investors will do well to do their homework and not simply go with the passive manager who shouts the loudest.    

Craig Gradidge is a Certified Financial Planner and Investment and Retirement Planning Specialist. 

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It has also been my view for some time now, with all the ‘’shocks and scares’’ like Steinhoff etc. that to be too ‘’intelligible as an active Portfolio Manager’’ is to be found out!

Passive management (Index Investment) is the only way to go! Don’t be caught (like millions did the last couple of years), by waiting for your active Portfolio manager to eventually give you a call when he already screwed up your investment, as he was ‘’trying to” beat the market with various investment strategies and/or buying/selling decisions of a portfolio’s securities.

The purpose of passive portfolio management is to generate a return that is the same as the chosen index instead of outperforming it, and $crewing it up! The management fees are also much less as this investment is not proactive.

…..index funds also invested in Steinhoff, EOH, Reselient etc

All agreed – but the panic button got hit- much sooner!

Is it not remarkable then that despite being invested in Steinhoff, the passives outperform? As a matter of interest, in the SA Multi Asset High Equity category over 5 years (i.e the balanced funds= the huge pool of retirement money/RAs, where advisors and fund managers tell you the “professionals will allocate your money and you do not need to worry about asset allocation”…the one where you would think they have their best shot at out-performance), the passives are all near the top (as they are in other categories too, like Global Equity 5 year performances, the other category you may expect fund managers to beat the index). The Sygnia Skeleton 70 is near the top (21/131) and beats one of the best active fund managers over many years, the Allan Gray Balanced A fund (the C is the TFSA): note that in comparing to Allan Gray, one is post-hoc cherry picking one of the top-performing balanced funds in SA (the inherent biases in doing so are self-evident). The other passive, the Satrix Balanced, is in position 15/131. Predictably the passives are all near the top and way above average, despite the potential that asset allocation may allow the professional fund managers, let alone supposedly avoiding the Steinhoffs!!! Coronation (63), Foord (89) etc nowhere in sight! Quite embarrassing actually, but predictable!–Multi%20Asset–High%20Equity&period=5yr

The problem with the Nedgroup Core diversified fund (position 15/138), is that it seems as though you need to use an Allan Gray or another platform, which adds a layer of costs, and will diminish the quoted performance? So, it may be wise for the man in the street to watch out for extra layers of costs when accessing passives.

The effective annual cost quoted on Satrix website is 0.87, while Sygnia quotes a Total Investment Cost of 0.63.

While past performance is no guarantee of future performance, the SPIVA performance tables across the world make it highly likely that the above performance of passives will be sustained, even in the category where asset allocation, in principle, gives active fund managers their best shot. The vidence suggest that the probabilities are stacked against them.

One thing people should not forget is that index investing is cheap (eg large S&P eft’s are under 0.1%) BUT all they promise is the index. Life was fun the past 9 years in the US with massive CAGR. It is not always like that : when the market is down an index etf will deliver, as promised, a negative return.

I think by now few people believe in active funds – they rarely deliver consistent sustained alpha after fees so their ten year track records suck (for those that still exist not having been shuffled off the websites due to embarrassment, or had their benchmarks redefined so as to suit the website).

IMO people should have some of their portfolio in index etf, some in individually selected equities. This applies to category local and category foreign so already four baskets. For foreign, SPY is great and with US firms giving such global revenues, it actually gives fairly global cover unless you have a really specific country goal like just Japan or just China.

Your individual selections have to be very focused – as in less than half a dozen. This is where you can shine, OR learn big lessons, or both but certainly interesting

Bonds, not for me. That’s like watching paint dry

Property funds and REIT, not for me as the accounting is nowadays a fiction of journals. Direct property is different matter

No surprises really, as investors with active managers will have high costs. Would be useful to compare information ratios and dispersion of returns around the active manager returns (something like the best 10% vs worst 10%).

Best Active manager over same 3 year period 33.2%. Average manager 11.2% source Moneymate)

I have both of them in my pension fund…and the winner the last 2 years….active

There is no such thing as a passive balanced fund. The asset allocation construction of any such fund is an active decision, even if it is managed thereafter as “passive”. Or put another way, what is the balanced fund benchmark?
The short term performance < = 3 years of funds mentioned in the article is likely explained by a few large cap counters that ran hard. Look back over a longer time period to get a meaningful comparison. Difficult tho hey? coz there is no agreed "passive balanced index" to look back on.

Actually there is a general consensus for a balanced index, as this is generally dictated by Reg28. So max 75% between local and offshore, offshore 30% etc etc.

In terms of the out performance, this is predominately due to the balanced funds exposure to local fixed income.

I agree, you have to make an active decision on the passive choice, however that is why a balanced passive fund is the “better” choice, as you not deciding between Top40, SWIX, industrials, Property etc. That decision has been made in a frame work (based on the return targets) and re balanced every 6 months.

Actually, an index is something that is defined with some precision. Reg 28 is not an index.
30% offshore? Or 25% ,etc – Active decision
Offshore in what – equity? Cash? Bonds? etc What ratios between them? – Active decision
Local equity weighting – 75%? 60% etc – Active decision
Offshore equity – S&P500? World Index? China? etc – Active decision

Or can someone tell me what the elusive balanced index is?
But don’t say reg 28 which gives very wide constraints that oblige the investor to make active choices.


It make no sense to compare American passive vs active trends with SA passive vs active trends because the investment opportunities are not the same. The American opportunities are much more productive and does not have the local vs global limitations.

I am a big fan of low cost, high tracking index funds but it is being positioned as some investing utopia (‘Could passive balanced funds rescue local investors’) when indexing can fail, and fail badly, just like any investment strategy. Over the last 25 years ALSI trackers have underperformed the ALSI Total Return by some 1.5% per annum! If you offered most people that deal they would not take it.

The idea of a passive balanced fund is good for the market, but it seems almost the same as choosing a unit trust. There is a spread of performance across funds chasing the “same” index!

I am not convinced yet about passive investing in SA, there are too few funds with more than 10 year track record. If you look at a chart of the best balanced funds over this period you will find the ranking changes depending on the period you choose to observe. Some of the best performers in the last five years were terrible in the preceding 5 years.

If not, look across the world at different countries, including SA (click on different countries)

10 and 15 year results of active fund managers who stay in business are even more abysmal
“Over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.”

The results are even worse than the above! Why?
“Approximately 79% and 57% of all domestic funds survive over 5- and 10-year investment horizons, respectively.”

5 charts that show the flow from active to passive funds

JTB the fact that 90%+ of active managers over a 5, 10, 15 year period underperforms is a mute point because 100% of passive managers would have underperformed over the same period. Would that then be an argument to go active? The issue one needs to understand is the extent of the underperformance. If for instance 50% of active managers underperform by 1% or less pa then that is actually very positive towards a pro active manager debate. If 90% of managers underperform by more than 2% pa then there is no doubt a case that one should go passive. A simple statement that 90% underperforms is meanless without knowing the extent of underperformance.

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