Home    ›    News & Opinions    ›    Active or passive? Thinking through what’s best for you

Active or passive? Thinking through what’s best for you

Oct 31, 2019 | Industry Trends, Market & The Economy | 0 comments

Estimated time to read:

There are very powerful forces at play in the asset management industry that will ultimately benefit you, the investor.
Waves of consumerism and waves of regulation globally are driving competition and increasing transparency in the investment industry.

These forces are driving down investment fees for the benefit of you, the consumer.

The hottest debate is over the use of low-cost index-tracking or passive investments or actively managed ones.

While we at Veritas do not advocate one investment approach to the exclusion of the other, declining fees across the board enable us to increase the probability that you, as a client, will achieve your lifestyle goals.

As independent advisers, we need to continually reassess how we implement the advice we give to you.

In a world of fake news, that means rolling up our sleeves and not just simply read the headlines.

The asset management industry just wants to attract your money into their funds. Our job is to slow everything down and check if the players are in fact giving us credible information.

The importance of fees
The price that you pay for an investment is very important.

The cheaper you can buy the fund the better your chances of achieving a better return. But it is not the only consideration.

If for some reason the underlying investment underperforms then it can have a knock-on effect on your lifestyle.

We have watched the international asset management market change dramatically over the past five years as regulators have demanded more transparency.

The rise in the use of passive investments has increased competition and has driven active managers’ prices down dramatically. We are now seeing excellent managers charging only 0.6% a year.

The narrower SA industry has reacted slowly. Fees have started to fall, but the international experience shows they have a good bit further to fall.

Imagine the day when the gap in fees between passive and active in the industry has narrowed significantly?

This will have a negative effect on the strongest passive argument but we will be forever grateful to the passive investment providers for increasing the competition and noise to drive the fees down.

The message investors often pick up from low-cost investment providers’ sound-bites is that all low-cost investments beat active managers.

This is simply not true. It is fake news to argue that “it’s not worth paying them that much” or “you won’t ever get a better return than the index”.

There are several active managers who do beat the low-cost passive managers over the long term, even with the high fees we currently have to endure.

Passive investments globally and locally have had a perfect 10 years. Since the global crisis, there has been a run to what are being referred to as quality stocks. These are rock-solid companies that pay regular and strong dividends.

The valuations (prices relative to earnings) of these companies in the US have been driven to very high levels.

Close to half the assets in the US have been moved out of active management into passive since the 2008-9 financial crisis.

The sheer weight of money being thrown at these quality stocks has been spectacular, regardless of their valuation.

Locally, low-cost passive investments have been less successful in attracting flows.

This is probably because the Naspers weighting is so big. But if Naspers is the reason so many investors stayed away from passive, it is precisely the reason that passive has done so well over the past 10 years.

Active managers believed they were being prudent by not owning that much Naspers (its index weighting is 19%), and their performance has suffered as a result.

Investment styles
Markets go through cycles and morph over time. The environment over the past ten years has been very conducive to passive funds and not helpful for value managers.

Twenty to 25 years ago Foord and Allan Gray were the only value managers and everyone else was a growth manager. Value managers were at the bottom of any performance tables.

Then after the dot.com market implosion more and more asset management houses started to make investment decisions based more on the underlying value of shares than purely on considerations of growth.

Now, it is hard to find a growth manager anymore in SA. It seems with the advent of passive funds the markets have changed, and passive became the new growth funds buying quality stocks locally.

Simultaneously, it has been tough going for value managers over the past five years.

How can there be so many poor active managers out there?
Anyone with a good business brain can see how much money can be made from asset management.

With many businesses controlling their own distribution (through tied agents) the money flows in strongly and regularly into their own funds. Advice is a loss leader and asset management is hugely profitable.

Fundhouse, an independent fund research and ratings house, estimates that between 70-75% of active managers in SA are not beating the relevant index and will be unlikely to do so in future.

The fees they earn are just too profitable. This is where independent advice comes into play. Buyers beware!

The answer in the end is that it is not a case of one or the other, it is probably a combination and knowing when a fee for potential outperformance is worth the bet and when paying the lowest fee is your best bet.



Submit a Comment

Your email address will not be published. Required fields are marked *

Get The Latest News

Sign up to receive regular news updates

You have successfully subscribed