The continued top performance by Index Tracking Funds

Mike Brown, Managing Director of etfSA.co.za.

We have pointed out in previous articles, the outstanding record of passive index tracking collective investment schemes, in delivering comparable total return investment performance to actively managed unit trusts, over multiple time periods.

As the appended investment return top five table shows, index tracking ETFs and unit trusts appear regularly in the top five performers of all 1300 collective investment schemes in South Africa. Index tracking passive investment strategies, obviously do not mean accepting lower investment returns, as these products more than compete with the best performing funds in the South African industry.

This is astonishing because:

• There are now 1200 plus actively managed unit trusts versus less than 100 passively managed index tracking ETFs and unit trusts in South Africa. So the actively managed industry is more than 10 times the size of the passive industry.

• The mandate for actively managed investment funds is to outperform their relative benchmark index. Passive funds have the mandate of only delivering the total return of the index.

• The appearance of index tracking funds in the top five of all collective investment schemes, for periods ranging from 3 months to 10 years, suggests that passive management works for all time periods. Active managers often say that, over time, they will outperform the benchmark indices – this is not borne out by the facts.

• An index effectively measures the average return for investing in a certain sector of the market or asset classes. Accordingly. you would expect index tracking investment products to provide returns around the average, or to be in the middle of the pack, compared with actively managed investment products. The ranking of so many index tracking products in the “top five” performing collective investment schemes is a sad indictment on the active investment industry.