National Treasury again stressed that pension fund trustees should pay more attention to passive investing as an option

In line with the National Treasury’s recent white paper on strengthening retirement savings, retirement policy specialist at National Treasury, David McCarthy, has suggested that pension fund trustees should carefully consider the option of passive invest

Speaking at the third annual African Cup of Investment Management conference in Cape Town, McCarthy said passive investing, which is often facilitated through exchange traded funds (ETFs), was under-utilised and should be explored by trustees as an option to the more conventional active investing.

He said National Treasury was particularly interested in seeing more passive investment management in the retail sector, where the uptake has been low.

McCarthy said he was concerned that high retirement fund costs were eroding the long-term benefits for members of pension funds, many of whom were poor and entirely reliant on their pensions once they retire.

“Trustees need to look at an appropriate pension fund investment strategy, particularly when investments are long term and expenses accumulate dramatically. Passive funds are known to have lower costs. Active management would need very careful justification by Trustees,” McCarthy added.

He also questioned the value of performance fees for asset managers in active pension fund management.

The National Treasury has said it’s committed to implementing retirement and savings reforms and to working closely with the industry to achieve its goals.

McCarthy said he was seeing an increasing move to a blended passive/active approach.

Helena Conradie, head of sim.smartcore, the passive investment management business at Sanlam Investment Management (SIM), said that “investors need to carefully consider which index fund to choose in order to take full advantage of the cost-efficiencies passive products offer. Evaluate your requirements and only add the bells and whistles you need, because you will have to pay for them,” Conradie explained.

An excellent way to avoid excess fund, advisory and management costs, ETFs provide investors with direct access to a basket of shares - such as the Satrix 40. They are also considered more transparent and flexible and require little or no administration, as they are accessed electronically. It is important to note that low-cost passive investments can also be accessed in unit trust format (traditionally viewed as actively managed products).

“Passive investment providers are becoming more client-centric. They try to innovate and offer smarter building blocks with which to construct your core portfolio. You get the most efficient solution and only pay for what you need – nothing more,” Conradie added.

She said interest in passive investing, which is hugely popular in the US, was growing in South Africa.

“There’s so much more interest at the moment. We’ve had good inflows this year. Smart beta products are definitely gaining momentum in South Africa.”

The head of ETFs and Index Products at ABSA Capital, Vladimir Nedeljkovic, agreed that more interest had been sparked in passive investing this year, adding that the range of ETFs has widened. “The spread is starting to cover different asset classes. The passive core can be very well constructed, as we have products that cover various investment teams.”

Sanlam Investment Management is the lead sponsor of the African Cup of Investment Management conference, hosted by IMN, which attracted a record 450 thought leaders and key industry players this year.