Category Investments

No clash between active and passive investment

15 July 2014 Wehmeyer Ferreira, Deutsche Securities
Wehmeyer Ferreira, Deutsche Securities.

Wehmeyer Ferreira, Deutsche Securities.

Active and passive investment is not an either-or proposition. Sensible investors can usefully combine both options.

The tip comes from Deutsche Securities, the Sandton-based marketers of db X-trackers, a range of five JSE-listed exchange traded funds (ETFs) that provide South Africans with a proven platform for simultaneous offshore diversification and low-cost passive investment.

ETFs track specific market indices and therefore do not charge the higher fees levied by active investment managers who chase market-beating returns.

The models adopted by active and passive managers are very different, but the philosophies are not mutually exclusive, says Wehmeyer Ferreira at Deutsche Securities.

He adds: “Consistent outperformance over time is rarely achieved. Some investors are therefore firm believers in the passive alternative at lower cost. They are content to buy the market and grow over time.

“Other investors are eager to capture additional upside through judicious identification of counters or unit trusts with high growth potential, even though costs tend to be higher.

“But one investment philosophy does not negate the other. Many investment professionals build portfolios that combine active picks with passive instruments. Retail investors can do the same, for their own account or in consultation with an investment adviser.”

Growth of South Africa’s ETF industry facilitates a mix-and-match approach. There are now 40 ETFs with a JSE listing as well as hundreds of local unit trusts dedicated to the active pursuit of superior performance.

One simple approach to portfolio construction involves a 50/50 split between ETFs and active unit trusts measured against the same benchmark, says Ferreira.

In this way, the investor protects a portion of the portfolio against underperformance by the selected active asset manager.

For example, the offshore component of a portfolio might comprise a 50% commitment to the MSCI World Index db X-tracker while the remainder is committed to a unit trust that seeks to outperform this same index.

The effect is the comfort of steady market performance linked to the potential for higher returns if the active manager is successful in the quest for investment alpha.

“If the active manager under-performs,” says Ferreira, “the passive component of the portfolio cushions the effects.”

Recently, the comfort provided by the World db X-tracker has been considerable. In the year to the end of May this Deutsche Securities fund achieved a return of 22.14% with market capitalisation of the fund expanding by 137.16%.

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