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INVESTORS WITH EVEN a hint of common sense would do well to cash in their existing unit trust policies and buy into an index-tracking product such as Satrix40, or take charge of their own investments with a stock-picking strategy. That's if you look at the data recently rolled out by Mike Brown, CE of online transacting platform etfSA.
Brown has reviewed the performances of actively managed unit trust portfolios over the past five years and compared them to the performance of Satrix40 over the same period. He found that 89,2% of South Africa's general equity unit trusts have underperformed the mechanical allocation of Satrix40, which tracks the JSE's 40 biggest stocks.
Brown describes the industry's performance as "dismal" - with the average fund returning 16,5% while the Satrix40 returned 19,82% to investors.
"I'd say that's probably about right," says Daniel Malan, of asset management firm RE:CM, one of SA's most highly regarded active managers. However, Malan says the five-year period Brown has used isn't a true reflection of a full investment cycle and doesn't paint a completely accurate picture for investors.
Says Malan: "The starting point and end point aren't a full investment cycle and it rather needs to be calculated from trough to trough or peak to peak." He adds it was a fact that index-tracking products worldwide would outperform active managers.
Paul Theron, of asset management firm Vestact, agrees: "I'd always pick Satrix. It would beat a general equity fund."
So if even the experts are acknowledging professional money managers aren't going to provide much in the way of outperformance, what should the average retail investor do to try and preserve his wealth? Part of the answer may lie in the performance of insurance giant Sanlam over the same period. Insurance companies are widely regarded as good proxies for the broader market and Sanlam's performance (excluding dividends) has roughly tracked the Satrix40 index over the same period. When dividends are taken into account and reinvested, Sanlam delivered around a 17% better return than buying the index.
Sanlam, says Malan, is a perfect example of where an asset manager can identify a stock that's undervalued relative to its peers and deliver return. "Sanlam has benefited from both a re-rating [relative to competitor Old Mutual] as well as dividends." But Theron believes investors are better served buying into a smaller model portfolio than either index-tracking or buying into a general equity unit trust. In Vestact's case, clients have a model portfolio of 10 stocks that have only seen a single swap over the past two years and one stock added to the portfolio, which has returned a compounded annual return of 26,4%.
Theron says there are three key issues for him if investors look at going the stock-picking or model portfolio route. First up, the investor needs to ensure he reinvests his dividends; second, he needs to ensure the costs of investing, including brokerage and admin fees, don't eat into investment performance; and, third, the investor can't fall into the trap of being too active in his stock-picking process.
Brown asks: "Why do financial intermediaries and other investment advisers focus almost exclusively on recommending actively managed investment products to their clients when passively managed ETFs [exchange-traded funds] provide superior performance?"
Warren Dick, of Investorcentre.co.za, says the answer lies in the fact that financial advisers are incentivised with higher commissions on unit trust products than index- or exchange-tracking products and a perception that the costs associated with the product remain high.
However, Dick says costs for trading ETFs are likely to be driven down. "By international standards, the Satrix40 is expensive, but we're still a growing ETF market."
