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The growing adoption of indexation strategies in our local market

21 February 2023 Satrix
Kingsley Williams, Chief Investment Officer at Satrix

Kingsley Williams, Chief Investment Officer at Satrix

Nico Katzke, Head of Portfolio Solutions at Satrix

Nico Katzke, Head of Portfolio Solutions at Satrix

Kingsley Williams, Chief Investment Officer and Nico Katzke, Head of Portfolio Solutions at Satrix discussed the performance of Satrix funds in comparison to industry funds at the Satrix H2 2022 update webinar which focused on providing viewers with indexation investment insights.

To follow are four key take-outs from the event.

1. Rules-based investing continues to rise
Index investing refers to investment portfolios designed to follow a set of rules, be it vanilla (simple capitalisation weighted) or non-vanilla (alternatively weighted). According to Nedgroup Investments’ Core Chartbook^, 31% of global assets are currently in some form of rules-based or indexed investment strategy. This is up from 29% a year in 2020 and 14% 10 years ago.

The same trend observed in foreign markets can be seen when studying the investment trends in the local market. In South Africa, rules-based strategies have increased across all the different vehicle types with an excess of 14% of assets under management (AUM) being managed by a rules-based strategy, made up of 55% unit trusts and 45% ETFs.

“There is definitely a growing adoption of indexation strategies in our local market, which we expect to increase in future, as investors highly prize the transparency and low-cost structure it provides, while performance has been strong too.” Observes Williams.

2. Multi-asset investment performance
Despite the volatility of the global investment landscape in 2022, Satrix balanced funds showed consistently strong performance over time, mostly outperforming more active peers, despite historically high opportunities for active differentiation in recent years. This shows the virtues of staying the course.

“Our balanced index fund offering has delivered exceptional returns, illustrating the value added by focusing our effort on the medium- to longer-term strategic asset allocation decisions, while utilising low-cost index tracker funds to construct well-diversified balanced funds.” says Williams, reflecting on the performance of the Satrix Balanced Index Fund which has been a top decile performer over the last 7 years, generating returns of 7.82% since its inception.

While the Satrix Low Equity Balanced Fund, intended for investors who are more risk averse, faced a challenging year in 2022, the fund performed in the top quartile over 3 years. On the fund’s performance, Katzke says, “When studying how the fund has performed over the medium term, it has held its own in the market. Enhancing the yield pickup in cash exposure and introducing the Satrix SmartCore™ Index as the domestic equity strategy, were amongst some key improvements made to the fund. Our continued focus on the long term and reducing unnecessary costs should see our balanced fund strategies perform well over the medium to longer term.”

3. 2022’s impact on factor investing
Factor investing, which involves targetting quantifiable characteristics that explain differences in stock returns, had a particularly difficult year in 2022 – arguably the most difficult in the last 20 years. Currently, the value spread relative to the growth spread is at its highest level in South Africa. “We’re seeing an excellent performance of value relative to growth,” said Williams.

“Interestingly, when studying the performance of growth since 2012, the underperformance of value indices has been a consistent feature of the local market, with very few periods seeing value managers outperform consistently.

“The RAFI 40 and DIVI+ indices, which a number of Satrix products track, have done well in capturing the value trends, with excellent performance being observed between 2009 and 2011 and again between 2021 and 2022. The Satrix DIVI+ Index Fund is one of the top performing funds within the (ASISA) SA Equity General category, allowing investors the ability to capture exposure to value well through our offering. It shows the benefits of blending different styles in a portfolio – to ensure rebounds are well captured.” says Katzke.

4. Looking ahead
“Satrix’s AUM has grown to R160 billion* off the back of third-party clients who entrust the business to manage their index-based mandates, and we are grateful for our clients’ support over time. The market more broadly has adopted Satrix strategies for their portfolios across a variety of investment vehicles, which we’re delighted with.

“Going forward, we aim to continue serving our clients and providing them with the great returns they’ve received since the beginning of Satrix’s history,” concludes Williams.

^Source: Nedgroup Investments Core Chartbook
*Source: Satrix, 31 December 2022.

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