Johannesburg - Retail investors could cut their costs significantly by looking at passive index tracking products as opposed to the high fees attached to actively managed portfolios - but don't expect your financial adviser to push these products.
This is according to Craig Chambers, the deputy managing editor at Umbono Fund Managers. He argues that independent financial advisers (IFAs) continue to push traditional active management unit trust products as opposed to lower cost index tracking products, which yield lower commissions.
Chambers points out that in the bull market experienced in SA markets from 2003 to early 2008, 20% returns tended to mask the fees charged by active portfolio managers. However, with markets turning down, investors will take a closer look at fees and ask some tough questions.
He points to a recent survey conducted by Alexander Forbes. This shows that for an average R100m pension fund, fees for an actively managed portfolio are 390% higher relative to equivalent tracker fees.
"It's fair to assume that equity returns will revert to their long-term rolling real average of 8% per year to prior to 2003. As a result, we estimate that active fund management fees, plus trading costs as a percentage of the expected 8% return (on a R100m fund) come in at 14% per year, while index tracking fees on the same basis come in at 2.8% per year.
Traditionally, there are two main forms of retail investment product for investors not directly investing in the market - either an actively managed portfolio which includes a fund manager supported by a research and investment team and an index tracking fund (for example, the Satrix 40) which mechanically tracks an index.
When looking at the South African market, Chambers points out that 80 stocks make up 96% of the top 11 managers' aggregated holdings in 2008. This, he argues, creates a "de-facto passive core" tracking an index, which you are paying active management fees on.
"Consumers need to start asking their IFAs to show the total expense ratio of different products in the portfolio," said Chambers. He believes retail investors need to specifically ask their IFAs to investigate passive asset management products.
Not far off
Mahesh Cooper, who heads up the institutional client offering for leading active manager Allan Gray, believes local investors need to take a hard look at their active managers.
Cooper said: "Relative to average active manager performance, retail investors could be better off in tracking products paying tracker fees."
He questions whether active managers in South Africa are really "active", pointing out that many include certain blue-chip shares in their portfolio, simply because they are afraid to underperform the index. "We don't start with a benchmark and then build a portfolio."
Neville Chester, a senior portfolio manager at asset manager Coronation, agrees that while the universe of shares to invest in on the JSE remains relatively small, an active manager can add value.
Chester said: "The point of an active manager is to pick the correct weighting of the right shares in a portfolio."
He points to 2008, when companies like Billiton and Anglo American were "patently overvalued" and yet index funds continued to put money into these shares due to their weighting in the index.
"This is an area where an active manager can deliver significant outperformance," said Chester.
Times are changing
Despite perceived high costs, index tracking products have been slow to take off in South Africa, says Chambers. He recommends that investors develop a mix of active and passive assets in their portfolios. "It's no longer simply a question of active versus passive management."
However, in the last few years, the South African market has begun to look at index tracking products as a component of investment portfolios that allow investors greater access to index tracking products.
The NewGold ETF proved very popular with investors in 2008, as investors sought to hedge their portfolios by investing in the underlying gold price.
Apart from various Satrix indexes, Deutsche Bank introduced their X-Tracker product which allows SA investors the ability to track the MSCI World, US, UK or Japanese indexes. Investec added a product to track the underlying performance of the SA bond market.
- Fin24.com