Active Vs Passive Investing in South Africa

FxJalarupa

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Less blah blah blah, more answers and stats.
Don't be in such a rush pretty bird...

This dance has just begun!

Soon I will provide you and yours with the touch light of knowledge that will pull you out of the darkness of ignorance once and for all... Until then consider how I can be so confident or arrogant (depending on your view point)... Surely I MUST know something that you do not?

For to go to this much trouble, the lesson must be worth the effort...
 

supersunbird

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Don't be in such a rush pretty bird...

1.This dance has just begun!

Soon I will provide you and yours with the touch light of knowledge that will pull you out of the darkness of ignorance once and for all... Until then consider how I can be so confident or arrogant (depending on your view point)... 2.Surely I MUST know something that you do not?

For to go to this much trouble, the lesson must be worth the effort...
1. The tango or the twist?

2. Maybe, and I know something you do not:
http://www.sygnia.co.za/personal-investments/frequently-asked-questions/
Under What is the difference between the Sygnia Skeleton and the Sygnia Signature product ranges?:

The aim of the Sygnia Skeleton funds is to offer investors access to well-diversified investment strategies in the most cost-effective manner possible. The management fee applicable to all the Sygnia Skeleton funds is 0.40% per annum (including VAT).

The Sygnia Signature funds are risk-profiled multi-asset class balanced portfolios managed using a blend of active and passive investment strategies. The underlying investments are allocated to a number of specialist asset managers selected by Sygnia based on their skills, experience, performance and operational and financial soundness.
While in the other thread you say:

Sygnia is about the same... without active management
Doesn't it just blow your superior mind that you didn't know this?

Anyway, if you'd just be so kind as to show the performance of the top 10 Reg28 compliant funds for 2013, 2014 and 2015, as well at the bottom 10 for the same years... if you have to tools to do that. I don't.
 

konfab

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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...
Answer the question: How do you pick a fund that will outperform the index?

Or answer this one: how much are you being paid here to promote something that no one wants?
 

Jehosefat

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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...
Alpha is only gains in excess of the index if the portfolio has exactly the same risk profile as the index (i.e. when beta is 1). Beta can provide gains in excess of the index when it is not 1.

The implication of this is that alpha is risk-free return since any volatility (risk) is captured by beta. Because there is no such thing as risk free return in a no-arbitrage setting (assuming the stock market is arbitrage free is a bit of a stretch however I don't believe there are sufficient opportunities for it to significantly affect the results), any alpha must, in fact, be beta on non-modelled risk factors. Meaning that if said risk factors were included in the model, alpha would go away.

You really don't understand this stuff very well considering you pretend to be an expert...
 

FxJalarupa

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School's in session

So let's keep this fun and educational!

We are all after all here to learn (myself included thank you sunbird)... ;)

So let us look at a good way to evaluate whether or not a active managed fund has the ability to outperform a cheap ETF that tracks an index...

The inherent flaw in the mass consciousness with regards to ETF out-performance rests on the fact that everyone wants to compare their Index ETF to a Pure Equity Fund, as this is what MOST of the research supporting the "ETF is the Beast!" meme...

Now I alluded a little while ago to a amazing thing called choice... This is the kind of awesome choice that Active Management affords one.

Let's steer the conversation away from the underlying reason we are all here and contemplate the following for a minute or two...

Is the unsophisticated retail investor able to manage risk whilst being invested in an Index Fund? - NO

Does the unsophisticated retail investor realize that by investing in a Index fund, that they have taken on a massive amount of risk with no downside protection? - PROBABLY NOT

Does the unsophisticated retail investor realize that Index Funds only perform well when the index is in a bull market? - DON'T THINK SO

So, then why would an unsophisticated retail investor invest in a product that is possibly not adequately matching their risk tolerance to their investment goals, because you will note that the volatility on a index is far greater than that of a actively managed fund...



Above you can see where active management (BLUE) squeezes volatility on the downside when the Index (GREEN) is tanking, and sometimes gives up performance on the upside due to the fact that active managers in many cases are just as concerned with capital preservation as they are with wealth creation...

For this reason and this reason ALONE I am a advocate of Active Management - It has the ability to mitigate risk to the downside, whilst still producing powerful market beating returns (fund and mandate dependent).

In other words our friend the unsophisticated retail investor is now placed in a better position by choosing active management than by choosing an index fund. They have dramatically increased the degree of VALUE that they derive from the transaction...

Got it...? Great! Now where were we?

Oh Yes...

The inherent flaw in the mass consciousness with regards to ETF out-performance rests on the fact that everyone wants to compare their Index ETF to a Pure Equity Fund, as this is what MOST of the research supporting the "ETF is the Beast!" meme...
A Pure Equity Fund in my honest opinion is JUST as poor an investment choice for the Unsophisticated Retail Investor (URI) because it too lacks the ability to mitigate risk to the downside... Markets do not always go up... Look at the Japanese Nikkei (20 year BEAR MARKET) and the events that came before this bear market were strikingly similar to the environment that we are faced with today...

Pure Equity Funds are more like tools of the Experienced and Seasoned Investor (ESI), to use to allocate capital to certain areas/sectors of the economy that they have ascertained hold promise in the future for creating better returns. This ESI is actually playing the role of a FUND MANAGER by selecting this Pure Equity Fund and I would say that those URI's that choose the index are also trying to be a FUND MANAGER by selecting something without any diversification...

So my point in closing is Coronation Top20 did horribly badly because Coronation is a Bottom UP, value biased, house that focuses on purchasing assets and companies that it perceives to be trading at a discount to something called its Intrinsic Value ... The problem with Coro was that they bought Anglo's (and a couple other mining / resources counters) at around 180 thinking it was cheap ... The problem was that Anglo's and their sector (which on a relative basis to fair value were trading at a massive discount) got a WHOLE LOT CHEAPER as the commodity bubble burst... Coro got blindsided by the GLOBAL MACRO market forces and were punished because they do not base their trades on Macro but on a company's balance sheet and potential for future earnings...

Now would a URI know this? does a URI go to hear Coronation discuss its investment philosophy and why they chose what they chose to invest in?

No, so how can a URI expect to minimize risk when they do not have all the information that is important to make such a decision...

I do however KNOW why someone would have chosen Coro Top20 - Because their past performance figures at the peak commodity bubble were astronomical! And the URI loves to buy on past performance...

Then what happens is the begrudged URI sees that they could have done slightly better if they just held the index over that period instead and they go into that fund... deja vu?

So the question was raised quiet vehemently, "how would you propound to produce a winner?"

Well I would firstly minimize Risk, because as an investor, THAT is the ONLY think I have control over... My choice allows me to CHOSE a FUND MANAGER who engages in Tactical Asset Allocation with a mandate to MAKE and not LOSE money! If that manager charges 2.5% after performance fees but has delivered what I required of them then I consider myself well positioned and served for my 2.5%

We must remember that when we buy a fund we are buying more than just a fancy name that sounds as expensive as it is... We are buying research, talent and protection... I'll give the sunbird what he wants and then YOU tell me who do YOU think would be the best choice going forward to beat the index?

Firstly and to recap the REG28 portfolio question.... I have chosen Multi Asset High Equity (Balanced Funds)

You have seen this before, but not like this... (spot the pattern - Look to see which Manager is consistent in beating - Luckily there's plenty of them)
 

FxJalarupa

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Now there are many that consistently end up in the first quartile (GREEN) those are the ones you would look to follow and vice versa in the RED or 4th quartile those got their calls horribly wrong...

Now lets look at Multi Asset Flexible and World Wide Flexible - This is like a Balanced fund but without the shackles of Regulation 28

1 Year



3 Year



5 Year



7 Year



10 Year

 

FxJalarupa

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Bottom Feeders

1 Year



3 Year



5 Year



7 Year



10 Year




So When you invest in Multi Asset Fund you are getting a Investment Professional Ensuring that your fund is well guarded against downside risk (Look at those 1 year numbers in relation to Index) and you are getting Out-performance over the long term...

NOTE that the 7 and 10 year numbers do not include all of the funds in the 1 year numbers and my guess would be that there would be a greater number beating the index at those time horizons once the positive numbers in year 5,3,1 start to pull through... If we enter into Bear Market territory then all Index funds are dead...

In closing I would like to stress that I am pro this form of active management as the costs, whilst the most expensive funds money can buy also offer the greatest amount of value for the price...

If I have a Actively Managed Fund that is consistently outperforming the index after fees... Then why not pay for the peace of mind of knowing that I don't have to make the buying and selling calls... Let a professional who gets paid to do this do it...

Thank you for taking the time to consider this... It's not my goal to "promote something nobody wants" its my goal to show those out there who have the willingness to listen and learn that what the main theme of this board is may be wrong... ETF's are NOT the be all and end all because they are cheap... Active Management creates Value that ETF's can not...

For the record I looked at those Sygnia Funds on Monday and I like them!

So much so that I have placed a price alert to buy me some Sygnia Stock ;)
 

Jehosefat

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What you have managed to show there is that most funds will outperform the market when it is doing badly and will under-perform when it is doing well. There's no alpha, just a beta of < 1.

Also apart from the 7 and 6 funds respectively that outperformed the market over 7 and 10 years, you would have done better to just hold an index ETF.

Furthermore, does your dataset include funds that are no longer active? Because if it does not, the 9% and 12% respectively of funds that beat the market over those time periods are overstated and the actual percentages that managed to outperform are lower.

Now, given that you have shown that there is a 87.5% chance of selecting a fund that under-performs the market over 10 years, how can you possibly claim that "Active Management creates Value"? And that's the best case of a multi asset fund. In a pure equity fund, precisely 1 fund managed to out-perform the market for a 97.7% chance of selecting a fund that under-performs...

Perhaps you should have said that if you are the lucky 1 person in 8 that selects a lucky fund manager that beats the market it has added value for you. If you are the other 7 in 8, it has destroyed value. Sounds more like a gamble than a sound investment strategy to me...
 
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konfab

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4th time:
You still haven't answered the fundamental question of picking the right fund. Or is it just the ones your buddies recommend?
 

Hendrix

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It's the one where the FA gets the highest commission, that's the one they will always advise.
 

FxJalarupa

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It's the one where the FA gets the highest commission, that's the one they will always advise.
The retail distribution review will change this sort of behaviour very quickly... We are moving top a more transparent and fair world and it's great for consumers as they will no longer get prayed upon by the lot you speak of...
 

FxJalarupa

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Honing in on Consistency

So I have heard all your rebuttals and I accept that it is very difficult to choose a fund when you are faced with such unsettling odds...

So lets try and make the exercise more manageable by only focusing on the Multi Asset World Wide Flexible Funds

Why? Because as far as I can see, the open international mandate of these funds is to just make money and preserve money by whatever means necessary, these guys are even able to sell short...

I have also adjusted the target to the maximum return minus the median return... I feel this is fair, as it allows for a more realistic outcome when comparing multiple Indices... (this also could account for fees of the product however I feel I am still being more than fair to the study)

So let's look at what the new figures deliver...?

1 Year



3 Year



5 Year



7 Year



10 Year



What we see is a much more interesting out-performance...

Regarding the longer term... We will see these newer WW Flexible Funds come to the fore and pull current out-performance into future results...
 

Hendrix

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The retail distribution review will change this sort of behaviour very quickly... We are moving top a more transparent and fair world and it's great for consumers as they will no longer get prayed upon by the lot you speak of...
I sure hope it does, as I'm sure a lot of the resistance you've experienced here stems from these leeches.

I'm personally not against active management, I allocate my full TFSA allowance to an actively managed fund, the Foord Flexible Fund. I'm not aware of another fund that has this flexibility, even the PSG flexible fund (which I use as well) is not as "flexible", only allowing 25% offshore exposure, the Foord Flexible fund can be 100% offshore or 100% local, hence me being a big fan.

But when it comes to pure local equity, I will always choose the ETF/index over the local unit trust, as picking a winner is impossible.
 
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FxJalarupa

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I sure hope it does, as I'm sure a lot of the resistance you've experienced here stems from these leeches.

I'm personally not against active management, I allocate my full TFSA allowance to an actively managed fund, the Foord Flexible Fund. I'm not aware of another fund that has this flexibility, even the PSG flexible fund (which I use as well) is not as "flexible", only allowing 25% offshore exposure, the Foord Flexible fund can be 100% offshore or 100% local, hence me being a big fan.

But when it comes to pure local equity, I will always choose the ETF/index over the local unit trust, as picking a winner is impossible.
Your Foord fund has been a real winner! (Comfortably smashing the index over multiple time periods)
I really like Dave's fund manager style! Many bemoan the fees they charge (uncapped performance fee) but my thinking is if they giving such massive returns relative to index and peers then who cares what they charge!?

I reckon eventually a lot of the "investment advice" that one pays a financial advisor for will be done via a computer algo... Robo Advice is coming in a big way to this industry and I think it's great! Data is power and those with the most data will have the most power... With just using Morningstar and Excel we were able to find very good fund managers who are consistent their Alpha and therefore deserve to get paid... What is stopping someone from choosing a Robo Advisor to do something similar and then make a recommendation after processing a investors financial, budget, income and tax variables in order to match needs with expected or even required rates of return?

That's why I'm bullish on Sygnia as they are looking to spearhead Robo Advice in the South African market!

The next thing to do would just be to make administration less expensive because their platform cost on external funds is still quiet high... But let's see what happens...
 

FxJalarupa

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The only way to truly benchmark a fund is on a rolling year on year analysis...

That way you can see how the manager intervenes to create alpha...

What I found truly amazing today is the Alan Gray Stable Fund... +-15% YTD for taking fairly low risk, with a performance fee that gets triggered at a measly cash+1 without any capping... for that fund to do 15% in this market shows that fund managers can use creative tools like Derivatives to create value (yes I know its a beta trade) ;)

These studies above are on the S&P and offshore markets, but I still feel we have world class managers who really shine in a net of cost situation... They have everything to lose and yet they still produce the goods year in and year out... For MUCH less RISK... which I think is key... Its easy to have the best performing index fund when the index is a one way bet due to QE and ZIRP/NIRP etc. Volatility will be the true barometer of the value of active management...

I remain a HUGE fan of Multi Asset Fund Management
 

Hendrix

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Yep. My emergency fund is spread across the Allan Gray Stable and Bond Funds.
I still maintain Passive has a place, active isn't everything and visa versa
 
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