Active management vital after JSE slide – STANLIB

Active investment management will be essential to optimise market opportunities in the post-credit crunch environment.

The prediction comes from STANLIB, the country’s largest unit trust company and a fund manager committed to active management of cyclical factors, strategic themes and specific research-based opportunities across its various investment franchises.

Navin Lala, Head of Institutional Strategy, acknowledges that the alternative approach – passive investment – had enjoyed support during sustained JSE growth from 2003 to 2007.

He notes: “Passive portfolios perform well in strong rising markets since they replicate the broad equity market by buying all the shares in the same proportion as represented in the index.

“As markets rise, passive portfolios follow the market higher. During bear markets these same passive strategies follow the indices all the way down.”

The long bull run had caused investors to forget that volatility – whether limited or extensive as of late – was inherent in market behaviour. Active management was needed to mitigate adverse effects.

The shortcomings of passive investing would be glaringly revealed in a volatile market subject to periods of weakness and sideways movement – a possible scenario sketched out by Lala in our much-changed domestic market.

“In contrast, active management gives portfolio managers the ability to implement various market strategies or themes,” says Lala. “This is through purchasing the shares of companies which they believe are good businesses; are able to create value over a sustained period; and that are appropriately priced or undervalued.

“Active managers also have the advantage of positioning their portfolios to exploit various themes such as the massive infrastructure spend currently under way in South Africa, and the management of exposures to rand hedge or rand leverage shares to enhance portfolio returns.”

Passive portfolios indiscriminately purchase shares in the index irrespective of a company’s financial standing or prospects, perhaps creating holdings in “undesirable” counters.

Lala points out that passive portfolios remain fully invested to replicate the index and lack the ability to be more defensive by holding larger cash or offshore exposures – a strategy implemented by many STANLIB franchises.

Passive portfolios can only perform in line with the index they track, while “active portfolios have the ability to significantly outperform the indices”.

In the STANLIB view, it is an opportune time to review the risk attributes of investments “while the lessons of the banking crisis are still fresh in our minds”.

Investors wanted to know “where to from here?” and what the long-term ramifications of the current crisis were likely to be.

Lala observes: “While it is still too early to accurately answer these questions, what investors should be doing is re-examining their investment strategy in the context of their objectives while establishing whether their current strategy is still appropriate…

“Markets are likely to be more volatile for longer and perhaps even move in a sideways fashion over an extended period.

“In environments like these, active management is the essential all-condition investment strategy and is required now more than ever.”