Prudential Investment Managers‘ Johnny Lambridis penned an interesting article last month in the Active/Passive debate.
Some of the points he made were:
- Passive investing is gaining ground in the South African market, mainly due to the (generally) lower fees involved compared to actively managed funds, but also based on some misperceptions stemming largely from the US experience, where this investment approach has become very popular.
- One of the common misperceptions driving the growing popularity of passive investing is that actively managed funds, with higher fees, are not delivering market outperformance (or “alpha”), to merit these higher fees, nor are they beating passive products on an after-fee basis.
- Almost all of the research around passive investing to date has been based on data from the US, where market characteristics differ quite significantly from those in South Africa. Simply assuming that this research equally holds true in local conditions is yet another misconception that shouldn’t be accepted at face value by South African investors.
- One important difference between the US and South African investment contexts is that ETFs – a popular passive vehicle in the US – enjoy a substantial tax advantage over actively managed unit trusts. This advantage does not exist in South Africa, where the two are subject to identical tax treatment.
- The FTSE/JSE SWIX Top 40 Index is one of the most highly concentrated in the world. This means that investors who track the index get far less diversification in their equity holdings than other broad market equity indices.
- A passive approach could provide better results in highly diversified, lower-cost markets, while an active approach would tend to outperform in less diversified, higher-cost markets. So one could expect that in South Africa, a higher proportion of active managers would be likely to outperform the market index – and therefore passive solutions – than in the US.
- Because of the cyclical nature of asset return cycles there are likely to be periods when passive solutions may outperform their active counterparts, but active management should continue to prove valuable for South African investors as they build wealth over time.
To read the full article please click here.
Comment: I believe that both Active and Passive have roles to play at various times in delivering returns which are appropriate for investors. As ever, it depends on the investor and their particular circumstances. Identifying appropriate strategies and investments is one of the important roles I undertake for clients.
Disclaimer: The information provided is not intended to address the circumstances of any particular individual or entity and should not be considered to be advice in any way. No person should act upon this information without first obtaining professional advice.