Active Vs Passive Investing in South Africa

FxJalarupa

Well-Known Member
Joined
Feb 23, 2016
Messages
169
There has been a discussion going on http://mybroadband.co.za/vb/showthread.php/806213-Best-Retirement-Annuities-(RA)-for-2016

This discussion centered around the "purchase of a RA in 2016" and I unfortunately evoked the wrath of many of the board members here when I suggested that one could get better returns after fees from a seemingly "more expensive" RA product in a more expensive fund than what is currently available on the cheap from low-cost providers such as 10x and Sygnia (which it appears the bulk of these members are currently invested in...)

So I ran the numbers in that thread and we found that what I was expounding was true... Active management in a Regulation 28 framework has beaten ALSI & Top40 Index including SWIX weighting adjustment in a "take the best case scenario over all indices" - Thereby placing further weight behind my claim that in South Africa Active Management is actually very capable of beating an index on a risk adjusted basis... Which frankly is what Retirement funds invest in...

So we saw a few members coming to the rescue of their "ETF is the Best Way to Invest" dogma last night and asked for all sorts of data to be pulled to try and suppress their current states of cognitive dissonance around this new found information they were seeing...

So instead of further clogging up the thread above, I propose a new fresh discussion around this topic whereby we get the facts about both active and passive management in the current South African context... Where it is relevant to us local investors here...

NOTE:

For the record and in the interests of full disclosure believe that it is incredibly difficult for pure equity fund managers to beat the index all the time, especially when that fund manager can only invest in South Africa

I would also like to state that I will always hold a preference to multi-asset flexible funds both REG28 mandated and internationally mandated as I feel they are able to remove risk on the downside due to the ability to engage in tactical asset allocation, unlike pure equity funds which are only able to hold small amounts in cash because of their mandate.

Hence I will be comparing pure equity ETF's (as well as risk profiled ones) to pure Equity as well as Multi-Asset Funds because in this world of investing, we as investors have a little amazing thing called CHOICE and this ability to choose any fund to invest in allows us to produce something referred to as alpha (gains in excess of benchmark or index) - This alpha is technically what an investor is paying for when they chose active management...

The above is a personal preference brought about by the wealth destruction I witnessed in 2007/2008 from investors who believed that - "You always make large gains in equity over time" (a Dogma which rapidly is coming to the end of its validity)

So if you are a purest then this discussion will upset you because you will find that in fact there are many funds out there that are MUCH MORE expensive and that CHARGE OBSCENE performance FEES that will beat your index tracking strategy (AFTER ALL FEES & COSTING DEBAUCHERY) because of a little awesome thing called Tactical Asset Allocation.

Having said this, there are a large number of Active Managers who struggle to produce alpha and you as an investor in that fund will be paying for a benefit that you are not receiving... This is why a bi-annual portfolio review with your financial planner (preferably a professional financial planner who knows a bit about this stuff) is so essential to ensure that your investment strategy still meets your needs in terms of what you are paying for... But if you are unhappy paying for advice and active management then you should be happy with what you get in your passive "buy and hold" investment strategy... But do not deride the facts that you are about to witness because of your own problems with paying for service and performance.

So hopefully this sets the record straight...

I will try and give you as much of a transparent view of the two investment styles as humanly possible in the most fair way. Your data requests are most welcome and I will endeavor to get around to pulling and compiling said data, depending on availability of data and when I have the time... (your own research and current data will also be appreciated)

Looking forward to a good debate on the merits of both... Because Passive has many merits but in my opinion is not a good strategy for the unsophisticated retail investor due to the volatile nature of the assets that you are engaging in... I fully understand why everyone is so "fee befok" because we as South Africans have been getting the short end of the stick from Life Companies and Pyramid Schemes and Fund Managers who charge to end of the earth for investment services that do not deliver, for far too long... But my message to you is, if you gather the data and cross examine the funds you can and will find many pockets of good value for money in active management!

Let the discussions begin!
 
Last edited:

konfab

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Joined
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Messages
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What is the weather going to be like this time next year?
 

Thor

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Messages
37,425
I like the ETF route is cheap and it's lekker plus I don't have to give a cut to the guy in the middle like I have to with my Alan gray and coronation fund
 

FxJalarupa

Well-Known Member
Joined
Feb 23, 2016
Messages
169
Okay so what follows is SA General Equity Versus Index...

1 Year



3 Year Annualized



- NOTE % FUND WITH ALPHA IS ACTUALLY 69.66% NOT 100%

5 Year Annualized



You can definitely see why certain managers won Ranging Bull awards in this space...
 

FxJalarupa

Well-Known Member
Joined
Feb 23, 2016
Messages
169
178 - Excluding world wide multi-asset funds...

One must remember that in this unprecedented and artificial Bull Market that was created by central banks money supply expansion that one could have basically thrown darts at the Sunday paper listing section for 3 years and you would have made money...

The real numbers will start coming in, in the next two years when we see markets stabilize and re-price in a world bereft of phantom liquidity...

The next 5 year numbers will be from the 3 year stats coming on line and 3 year from the 1 year... so telling times for passive in the future... IMHO
 
Last edited:

konfab

Honorary Master
Joined
Jun 23, 2008
Messages
21,179
178 - Excluding world wide multi-asset funds...

One must remember that in this unprecedented and artificial Bull Market that was created by central banks money supply expansion that one could have basically thrown darts at the Sunday paper listing section for 3 years and you would have made money...

The real numbers will start coming in, in the next two years when we see markets stabilize and re-price in a world bereft of phantom liquidity...

The next 5 year numbers will be from the 3 year stats coming on line and 3 year from the 1 year... so telling times for passive in the future... IMHO
16/178 = 9% chance of your fund...that costs more...beating the index.

You still haven't answered my question. How do you pick the right fund?
 

JayM

Expert Member
Joined
Oct 30, 2005
Messages
2,072
There has been a discussion going on http://mybroadband.co.za/vb/showthread.php/806213-Best-Retirement-Annuities-(RA)-for-2016

This discussion centered around the "purchase of a RA in 2016" and I unfortunately evoked the wrath of many of the board members here when I suggested that one could get better returns after fees from a seemingly "more expensive" RA product in a more expensive fund than what is currently available on the cheap from low-cost providers such as 10x and Sygnia (which it appears the bulk of these members are currently invested in...)

So I ran the numbers in that thread and we found that what I was expounding was true... Active management in a Regulation 28 framework has beaten ALSI & Top40 Index including SWIX weighting adjustment in a "take the best case scenario over all indices" - Thereby placing further weight behind my claim that in South Africa Active Management is actually very capable of beating an index on a risk adjusted basis... Which frankly is what Retirement funds invest in...

So we saw a few members coming to the rescue of their "ETF is the Best Way to Invest" dogma last night and asked for all sorts of data to be pulled to try and suppress their current states of cognitive dissonance around this new found information they were seeing...

So instead of further clogging up the thread above, I propose a new fresh discussion around this topic whereby we get the facts about both active and passive management in the current South African context... Where it is relevant to us local investors here...

NOTE:

For the record and in the interests of full disclosure believe that it is incredibly difficult for pure equity fund managers to beat the index all the time, especially when that fund manager can only invest in South Africa

I would also like to state that I will always hold a preference to multi-asset flexible funds both REG28 mandated and internationally mandated as I feel they are able to remove risk on the downside due to the ability to engage in tactical asset allocation, unlike pure equity funds which are only able to hold small amounts in cash because of their mandate.

Hence I will be comparing pure equity ETF's (as well as risk profiled ones) to pure Equity as well as Multi-Asset Funds because in this world of investing, we as investors have a little amazing thing called CHOICE and this ability to choose any fund to invest in allows us to produce something referred to as alpha (gains in excess of benchmark or index) - This alpha is technically what an investor is paying for when they chose active management...

The above is a personal preference brought about by the wealth destruction I witnessed in 2007/2008 from investors who believed that - "You always make large gains in equity over time" (a Dogma which rapidly is coming to the end of its validity)

So if you are a purest then this discussion will upset you because you will find that in fact there are many funds out there that are MUCH MORE expensive and that CHARGE OBSCENE performance FEES that will beat your index tracking strategy (AFTER ALL FEES & COSTING DEBAUCHERY) because of a little awesome thing called Tactical Asset Allocation.

Having said this, there are a large number of Active Managers who struggle to produce alpha and you as an investor in that fund will be paying for a benefit that you are not receiving... This is why a bi-annual portfolio review with your financial planner (preferably a professional financial planner who knows a bit about this stuff) is so essential to ensure that your investment strategy still meets your needs in terms of what you are paying for... But if you are unhappy paying for advice and active management then you should be happy with what you get in your passive "buy and hold" investment strategy... But do not deride the facts that you are about to witness because of your own problems with paying for service and performance.

So hopefully this sets the record straight...

I will try and give you as much of a transparent view of the two investment styles as humanly possible in the most fair way. Your data requests are most welcome and I will endeavor to get around to pulling and compiling said data, depending on availability of data and when I have the time... (your own research and current data will also be appreciated)

Looking forward to a good debate on the merits of both... Because Passive has many merits but in my opinion is not a good strategy for the unsophisticated retail investor due to the volatile nature of the assets that you are engaging in... I fully understand why everyone is so "fee befok" because we as South Africans have been getting the short end of the stick from Life Companies and Pyramid Schemes and Fund Managers who charge to end of the earth for investment services that do not deliver, for far too long... But my message to you is, if you gather the data and cross examine the funds you can and will find many pockets of good value for money in active management!

Let the discussions begin!
Cool story bro.
 

supersunbird

Honorary Master
Joined
Oct 1, 2005
Messages
48,633
Okay so what follows is SA General Equity Versus Index...

1 Year



3 Year Annualized



- NOTE % FUND WITH ALPHA IS ACTUALLY 69.66% NOT 100%

5 Year Annualized



You can definitely see why certain managers won Ranging Bull awards in this space...
Can we have the bottom performers too?
 

Jehosefat

Expert Member
Joined
May 8, 2012
Messages
1,234
Also claiming that everyone who beat the index had "alpha" is incorrect. Its only "alpha" if they had exactly the same risk profile as the index itself. There is a good chance a lot of it is "beta"...

There is also an argument that there is no such thing as "alpha" and any observed "alpha" is actually just "beta" on unmeasured risk factors.
 

Excalibur

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Joined
Apr 29, 2007
Messages
2,577
16/178 = 9% chance of your fund...that costs more...beating the index.

You still haven't answered my question. How do you pick the right fund?
You can't, they change almost every year. Next year you can even have a newly formed fund winning. Over the long term you are better off with your market average ETF especially considering the costs.
 

konfab

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Joined
Jun 23, 2008
Messages
21,179
You can't, they change almost every year. Next year you can even have a newly formed fund winning. Over the long term you are better off with your market average ETF especially considering the costs.
I know that, I am just interested in how a proponent of active funds picks them.
 

supersunbird

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Joined
Oct 1, 2005
Messages
48,633
I know that, I am just interested in how a proponent of active funds picks them.
Indeed, maybe FxJalarupa can tell us his prediction of the Top 5 or Top 10 funds for one year from now and in a year we can see?

My one lump sum, managed fund RA has Coronation Top 20 and Marriott Dividend Growth fund as its 50% local equity component, Coro Top20 hasn't even grown 1% over the past year, Marriott Dividend Growth fund is on 1.8% over the same period. Where's my alpha FxJalarupa? :(
 

FxJalarupa

Well-Known Member
Joined
Feb 23, 2016
Messages
169
Also claiming that everyone who beat the index had "alpha" is incorrect. Its only "alpha" if they had exactly the same risk profile as the index itself. There is a good chance a lot of it is "beta"...

There is also an argument that there is no such thing as "alpha" and any observed "alpha" is actually just "beta" on unmeasured risk factors.
FFS now you trolling me on this thread...?

Alpha is gains in excess of benchmark (which I said) - benchmark can be index that's why it was mentioned...

Beta is the rate at which your fund moves in a correlated fashion in relation to benchmark or index...

There is also an argument that there is no such thing as reality and I am right now engaged in a existential conversation with myself...
 

Hendrix

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Joined
Aug 2, 2012
Messages
845
16/178 = 9% chance of your fund...that costs more...beating the index.

You still haven't answered my question. How do you pick the right fund?
It's a game of chance, like at a casino...
If 90% of actively managed funds beat the index, it would be a no brainer, unfortunately, it's the other way round.
 

supersunbird

Honorary Master
Joined
Oct 1, 2005
Messages
48,633
FFS now you trolling me on this thread...?

Alpha is gains in excess of benchmark (which I said) - benchmark can be index that's why it was mentioned...

Beta is the rate at which your fund moves in a correlated fashion in relation to benchmark or index...

There is also an argument that there is no such thing as reality and I am right now engaged in a existential conversation with myself...
Less blah blah blah, more answers and stats.
 
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