Don’t ignore an active investment strategy over a conservative mind set
During the majority of 2013, government spent considerable effort on solidifying its plan for its ambitious retirement reform programme. Particular issues which were focussed on were increased participation, cost containment, flexibility and preservation.
The purpose of this outlook is to increase the number of South African citizens who will be able to retire comfortably enough to maintain their lifestyle. This issue was set to take centre stage once again in 2014 before the Financial Services Board indicated that it needed time to make sure that all of the initiatives that government wishes to implement are legally sound, and are in fact in the best interest of the public.
This will allow fund managers to sit down with policyholders to discuss the debate between passive investment and active investment.
Be aware of the current market conditions
Financial indexes work in cycles, and it is during these cycles that advisers need to make the decision of recommending a passive or an active investment fund.
Government has stated in the media that it currently favours a passive form of investing where policyholders will be protected from a significant amount of risk.
There seems to be clear logic backing up their support. When resource shares perform well relative to financial and industrial shares, active managers struggle to outperform the index. Despite the recent turmoil which has plagued the mining sector, there is significant global demand for commodities as gold is still favoured as a safe haven investment and China is moving ahead with its infrastructure build programme, albeit tentatively.
However, this does not mean that the active debate needs to be completely ignored. On the contrary, Jann Krynauw, Partner at Rezco Asset Management, points out that there is room for both approaches in the current market.
He points out that the debate between passive and active management has been very topical in the local market over the past few years. "There has been an increased interest in passive investment funds. Policyholders want to understand their investment and its performance” says Krynauw.
There is also more transparency when it comes to fees. A passive manager simply tracks the performance of an index while an active manager is paid to make decisions in order to outperform the index. And as Krynauw adds, there is a lot of benefits to be had from clarity on fees in the current economic climate. With more transparency around fees, policyholders are in a better position to determine whether they are receiving value for money from active funds.
Are the right questions being asked?
While there is a noticeable trend towards favouring passive investments, Krynauw questions whether investment conditions in South Africa are favourable towards passive investing.
"A key aspect of an active managed fund is flexibility the ability to move between investment types when conditions change to favour each investment. The policyholder needs to be comfortable that the active asset manager is able to add value and manage risk effectively through active allocation management,” says Krynauw.
Adjust the risk and stay active
This sentiment is shared by Frank Richards, Head Momentum FundsAtWork Investments, who feels that a slight risk adjustment on actively managed portfolios may pay off in the long run.
"Most policyholders consider passively constructed portfolios because they are cheaper when compared to active managed portfolios. It is however important to note that although active investment managers are paid to outperform indices over the long-term, they are also remunerated to manage the risk within the portfolio. This may require them to manage the assets in a slightly different way and position the portfolio more defensively especially if they are concerned about the level of shares valuations or the index as a whole,” says Richards.
He adds that if these so called expensive investments continue to perform well, and the active manager has reduced the exposure in an attempt to manage the risk within the portfolio, relative returns will suffer as a result. When the average member compares portfolios they often only look at historical returns and investment management fees, and they do not appreciate the intellectual property that is encapsulated within the portfolio construction.
"This is the reason why risk adjusted returns of actively managed portfolios often compare favourably to passively managed portfolios. It is also the reason why most active managed portfolios add most of its value relative to passively managed portfolios in a declining market environment where the volatility and draw downs are less. This is of particular importance in the retirement fund industry where retirement fund benefits are used for retirement as well as short term funding needs like providing for an employee in the event of unexpected retrenchment,” says Richards.
Editor’s Thoughts:
There are a lot of factors to be taken into consideration when selecting a passive investment method over an active investment method. It will be interesting to see how this develops over the coming months. Please comment below, interact with us on Twitter at@fanews_online or email me your thoughts [email protected].
Comments