Category Investments

Actively passive

14 September 2018 Sylvester Kgatla, Absa
Sylvester Kgatla, Head of Absa Fund Managers at Absa Wealth and Investment Management.

Sylvester Kgatla, Head of Absa Fund Managers at Absa Wealth and Investment Management.

Absa Fund Managers has launched a plethora of passive funds. This initiative focuses on expanding the current offering in order to add to the variety of Collective Investment Scheme Funds (“Funds”) that investors can choose from. With a full suite of diverse and cost-effective solutions, investing is now much more accessible.

Investors no longer have to choose between passive and active investment solutions. Both solutions not only have space in a perceptive investor’s portfolio, but each serves an important role in achieving your goals as an investor. The benefit to this dual investment solution is a higher likelihood of returns across various market conditions.

Passive funds are those that track an index of stocks or bonds, and attempt to mirror the index in terms of returns. During periods of less market movement, passive funds have historically offered attractive returns at a lower cost.

On the other end of the spectrum is active fund management, which is where a fund manager takes positions that differ to the benchmark, or the index, based on research. This is done with the aim of generating excess returns. These funds have been found to historically perform significantly well in periods of high volatility in the market, as excess performance is generated from stock selection.

It is important to understand what you get when you invest in passive funds. The role that passive funds play is particularly important for those who understand how difficult it is to time stock or bond market movements and, instead of trying to beat the market, are happy to track it and get similar returns.

Asset managers are able to do this because they benefit from lower trading costs, due to economies of scale. A passive fund, for example, by tracking the JSE Top 40 index would track all the investments in the index. The objective of the fund is to track and match the index.

The manager buys the respective instruments and holds them unless the holdings fall out of the index. They rebalance when the index rebalances, which is difficult for individuals to do as one would need to keep track of the index to know when changes occur, whereas asset managers get notifications from the exchange telling them when changes are about to be made.

The benefits of passive funds are that they are a safer choice for those investors with limited access or time for research. They also assist for those with time constraints, who do not have the opportunity to research active managers and pick a manager style most suited to their needs.

Investors also get the peace of mind of not having to worry about timing the markets. Timing the market can be difficult, if not impossible and can result in significant trading costs. Investors opting for passive investments can take a buy-and-hold approach in which they do not have to constantly worry about the money invested over their investment time horizon.

There are also single manager solutions. Absa, for example, has four products covering the bond, property, equity and dividend-plus indices. Satrix has a range of products also covering bonds, equity and dividend-plus indices as well as money market and balanced passive funds.

For investors who prefer a combination of different managers to capture different expertise, and also want stable, risk-adjusted returns, the multi-managed fund option addresses that need. The multi-managed passive solutions are most suited to those investors looking for protection from cyclical movements in markets. In the multi-managed space, Absa offers three products that track the low, medium and high equity sector averages.

Setting up your portfolio with both types of funds, and ensuring it is well diversified, can remove the pressure on the investor to figure out when to make changes, and capture the upside once it is opportune.

When all is said and done, investors always seek positive financial returns over time, ultimately building wealth. Whether one goes for active or for passive funds, one of the best ways to build wealth is to invest, and to invest wisely. 

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