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Nearly three decades ago Nobel laureate William Sharpe said that if “active” and “passive” management styles are defined in sensible ways, it must be the case that before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar, and that after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period and depend only on the laws of addition, subtraction, multiplication and division.

The truth revealed by William Sharpe is that the collective return delivered by active and passive investment managers combined equals the market return (because combined they are the market) and that the difference in returns delivered between all the active and all the passive managers respectively, on average, is attributable to fees.  We can further infer that investing in actively managed funds, the outcomes range from significantly outperforming the market to significantly underperforming the market over extended periods, whereas investing in passively managed funds, the outcome is much more certain, but guaranteed to underperform the market due to fees, i.e. delivering “index minus”.

There is however an alternative, called enhanced indexation – the best of both worlds.  Instead of outperforming the equity market with superior stock picking (or luck?), market exposure is gained efficiently through derivatives and the cash held as cover assets under those contracts can be “enhanced” to effectively create a more predictable and robust outperformance (alpha) in an area where the manager has greater probability of success.  The combined effect of thin but stable alpha and low fees results in delivering “index plus”.

At Prescient Investment Management, we excel in the management of derivatives, interest bearing assets and index tracking.  As a quantitative investment manager, these three skills are part of our DNA.  Combining these areas of expertise in an innovative and efficient manner results in enhanced indexation – the best of both worlds.

Join this free webinar on Tuesday, May 22 at 11h00.

You can register here.

Meyer Coetzee, executive director & head of Retail at Prescient Investment Management

Meyer joined Prescient Investment Management in September 2013. He is primarily responsible for product development and pricing and the design and implementation of the sales and distribution strategy. His career started at Alexander Forbes in 1991 as an actuarial assistant in their retirement fund division. In 2000 he joined a niche asset manager in Cape Town as Marketing Manager and in 2001 became a Product Development Consultant with Galaxy Portfolio Services Pty (Ltd), the Linked Investment Services Provider within Old Mutual, which later became Fairbairn Capital Pty (Ltd). In 2004 he was appointed as head of Product Development and Portfolio Management at Symmetry Multi-Manager, a position he filled until his appointment at Prescient Investment Management in September 2013. Meyer holds a Bachelor of Commerce (Actuarial Science) degree from the University of Pretoria, is a CFA Charterholder, a Fellow of the Institute of Actuaries and a Certified Financial Planner®.

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