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Index trackers vs managed funds

Johannesburg -You can expect a continuation of emotional debate on whether a portfolio invested in an index of shares will deliver a better return than one in which a professional manager selects the shares, for as long as there are portfolio managers and the returns on investments they manage differ.

Latest results of unit trust investments seem to indicate that passively managed (index tracker) funds are unable to produce better returns than the indices themselves in a falling market.

To tell the truth, many of these funds' returns were even lower than the performance of the index itself.

The reason is simple. If the prices of all the shares within a particular index fall, the index fund cannot perform better than the index and costs - even if low - further dilute the return.

On the other hand, actively managed portfolios can produce better returns in a declining market because the managers are able to select those shares whose prices are rising.

One therefore often hears the argument that actively managed portfolios are good in a bear market, and passively managed portfolios better in a bull market.

Much research has been done over the years, and most researchers have come to the conclusion that actively managed portfolios do not in the long run produce better returns than their passively managed counterparts.

Karl Leinberger, head of investments at Coronation, said the problem with this research is that it is based on the average portfolio manager.

"The average active portfolio always produces a poorer return than can be achieved in the index, but so does the average passively managed portfolio.

"What is lost sight of is that good active portfolio managers always produce better returns than the market or the index," said Leinberger.

Latest results on unit trust returns from Profile Media indicate that only two of the index funds classified as general unit trusts delivered better returns than the market's 7.7% in the 12 months to end-December.

In the three years to end-September the All-share index total return was 6.7%, and that over five years 19.5%. In both of these periods, only one index fund produced a better return than the average of the All-share index.

- Sake24.com

For more business news in Afrikaans, visit Sake24.com.

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