Trend towards low-cost, transparent index investing
27 January 2014 | Investments | ETF's (Exchange Traded Funds) | Gareth Stobie, Grinrod Bank
The last decade has seen a significant shift among global investors towards the use of passive index products, especially Exchange Traded Funds(ETFs).
In contrast to global markets, South African investors have been "surprisingly slow” to adapt their approach, said Gareth Stobie, head of capital markets at Grindrod Bank. However, this is changing.
"According to Blackrock,an all-time global record was set last year, with $247.3 billion flowing into exchange traded products (ETPs),” said Stobie. The total assets under management in the global ETP market now exceeds $2.4 trillion.
"This shift has been driven by the low cost, efficient and transparent character of ETF funds, and the belief held by many investors that most active fund managers, who are inherently more expensive, cannot consistently beat the benchmarks they set for themselves,” he said.
"Performance tables support this notion,” said Stobie. DRW Investment Research indicates that less than 20% of equity fund managers outperformed the SWIX Equity Index over the 10-year period to June 2013.
"One of the catalysts for change among South African investors is a growing awareness of the cost of investing. National Treasury also recently highlighted increased use of passive investment strategies as a means to reduce the costs associated with saving for retirement,” said Stobie.
Having identified the trend towards passive investing, Grindrod Bank launched the GTrax suite of ETFs in 2013. With this offering attracting inflows and together with its other products, namely preference shares and listed property, the Bank now manages more than R450m in the passive investment sector. It has plans to launch two smart beta equity ETFs in the near future.
"Passive funds have become attractive for other reasons too, including good potential for returns at lower risk and tax efficiency,” said Stobie. The Bank’s property ETFs (PTXTEN and PTXSPY) have followed the sterling performance of the local listed property market in recent years. Furthermore, PREFEX is an efficient income tool (yield of 7.3%) for tax sensitive investors and those who want to hedge their risk against interest rates hikes in the medium term.
Recently, the Bank reduced the management fees on some of its funds to 0.425% (ex VAT), making them some 60% cheaper than the retail average of their active counterparts.
