SA joins global trend towards passive investments

A key feature of the government’s proposals to reform the current retirement investment structures in place in South Africa is the swing towards passive investments, echoing similar moves that are taking place around the world as globally investors increa

This is according to De Wet van der Spuy, Divisional Director: Product at Liberty Corporate, who says international trends have shown that on average up to 60% of retirement fund assets are being placed in passive funds, with niche active asset managers being selected to add value to the investment strategy.

“Instead of delegating fund managers to oversee an equity portfolio – incurring substantial fees in many cases – investors who adopt a passive investment strategy simply opt to put their money into an index tracking fund whose returns match the asset class being traded, i.e. the average performance of equities or bonds in the market.”

Van der Spuy notes that this strategy has certain advantages. “Passive investments are relatively less costly to manage and offer an alternative to the whims and intuition of individual asset managers. A passive investment also enables the investor to get the full exposure to the market, but at very low cost.”

He notes that the South African investment industry has seen a number of these passive structures coming to the fore over the past three to five years. “Historically, investors have tended to prefer going the ‘multi manager’ route in order to avoid the risk of a single asset manager underperforming. The fact is that by utilizing a passive investment strategy, the investor can remove this risk entirely.”

In fact, Van der Spuy says the majority of long term growth is often generated through strategic and tactical asset allocation rather than the choice of manager. “It is estimated that in excess of 80% of returns tend to be generated by the asset class decision that the investor makes, with the remainder generated through stock selection by selecting the right active asset manager.”

He notes that alternative risk-managed investment solutions are also becoming increasingly popular. “In the past the tendency was to select an average balanced fund, selected from a mix of equities and bonds. We are now seeing funds increasingly using sophisticated techniques to make more selective and higher conviction calls on equities and bonds, so offering a better blend between growth and volatility.”