How good are fund managers really?

Steven Nathan, Chief Executive of 10X Investments

94.8% of actively managed domestic general equity funds in South Africa have underperformed the FTSE/JSE All Share Index over the 20 years to 31 December 2010.

Put simply, 19 of 20 South African fund managers have delivered results below the market index over 20 years.

While this ratio improves as the period decreases, still, more than 85% of funds underperform the index over five years and 61.5% underperform it over one year.

“Investors are led to believe that professional managers reliably beat the market index, but after costs, the index beats professionally managed funds most of the time,” says Steven Nathan, Chief Executive of 10X Investments (pronounced tenex).

“Sadly, it is investors that foot the bill for the underperformance of active management,” notes Nathan.

Active management is premised on the notion that their fund managers can identify the stocks that will out or underperform the market and thus deliver their investors an above-average return. But the return of the market is finite, so active management is a zero-sum game before costs. Yet the investor is faced with hundreds of investment choices, which all come with fees for active fund managers and commission driven brokers.

John C. Bogle, Founder of The Vanguard Group, Inc., one of the two largest mutual fund organizations in the world says that trying to beat the market "is a loser's game. The more the managers and brokers take, the less investors make."

The result is low investor returns in an industry where fees are the most dependable indicator of a fund’s future performance. “On average in South Africa, aggregate fees reduce the real (after-inflation) investment return by approximately 75%,” says Nathan.

“It is estimated that 94% of South Africans do not have adequate financial resources at retirement. Clearly the industry is failing the investor. We plan to change this,” says Nathan.

Some of the most respected financial minds in the world agree that index funds are the first option for most retirement investors.

"A low-cost index fund is the most sensible equity investment for the great majority of investors,” says Warren E. Buffett, Chairman, Berkshire Hathaway Inc.

Nathan explains that an index fund seeks to mirror the performance of the stock market by investing directly in the shares that make up the market. He describes this model as simple and elegant. “In fact when people first learn about indexing they often react in disbelief at its sheer simplicity and effectiveness,” says Nathan.

“People often hold the misconception that a successful investment has to be complex and complicated.” This, notes Nathan, is completely untrue.

“The simple truth is that index funds beat most professional managers. As the cost of indexing is lower than active management, on average it delivers a higher return to investors than active management,” Nathan points out. “Index investing allows retirement investors to get the most out of their investment,” says Nathan.

10X provides corporate retirement investment to leading blue-chip companies including Deutsche Bank, I-Net Bridge, African Bank and Macquarie. In 2011 it introduced a solution to the retirement industry problem for individual investors. The 10X RA is an innovative direct retirement investment, allowing investors to extract the most out of their investment through low fees, automatic life-stage portfolios and excellent service.

10X is different. “Our model offers investors a ‘simple, direct, low fee’ solution to the retirement industry problem. It cuts out the middle-man, reduces fees through index investing and delivers best practices to investors,” says Nathan. As 10X is a direct investment there are no brokers, so no broker fees.

All this means that 10X has low fees – around half the industry average.

“Direct low-cost index investing offers investors a higher return at lower risk. We believe that it is going change the future of retirement investing in South Africa,” says Nathan.