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A Fin24 reader writes:
I have approximately R450 000 in the Satrix 40 exchange-traded fund (ETF). This is purely for investment and capital growth.
Would it be prudent to move to a stockbroker or portfolio manager who can actively manage this cash over the next 10 years, in the hope that this will show better growth than at present?
We asked Chris Wehmeyer, portfolio manager at PSG Konsult and Mike Brown, managing director of ETF platform www.etfsa.co.za, to respond.
Chris Wehmeyer of PSG Konsult:
The nature of an investment in an actively-managed share portfolio compared to investing in Satrix differs markedly.
Satrix 40 ETF is a basket of the largest 40 companies on the JSE with the aim of tracking the Alsi 40 index.
A disadvantage of investing in Satrix 40 ETF is that 50% of the Satrix portfolio consists of resource and mining companies; should the resource sector underperform over a protracted period, the Satrix 40 ETF would underperform the broader market.
The total market capitalisation of the Alsi 40 index is used to weigh the company in the index.
Therefore you find excessive weightings of companies such as BHP Billiton (16%) and Anglo American (12%) in the ETF, which may increase the risk of the portfolio should something go awry at one of these companies.
An individual share portfolio is an active way of investing in the market with the aim of outperforming an investment benchmark index such as the All-share index.
It is also a more flexible and transparent way of investing in the JSE to suit the investor's own unique requirements. Investors can easily adjust their portfolios to changing market conditions, without the rigidity of an index fund.
The portfolio manager will construct a portfolio according to his strategy and that could include buying companies with high dividend yields and growth stocks, or buying companies that are undervalued.
Actively managed funds are more expensive to maintain as management fees and brokerage would be between 1% and 2% annually, compared to Satrix annual fees of 0.8% plus adviser fees of 1%.
It is important to find a reputable stockbroker to manage the portfolio.
Mike Brown of www.etfsa.co.za:
The investor has invested his money in Satrix, a passive investment instrument that benchmarks the main JSE indices. Satrix products provide the average return of the stock market, which is what indices do.
Research indicates that only a small percentage - 20% to 30% of active managers - outperform an index over time, before costs. After costs (including stockbrokerage, custodianship, management, advisory fees, etc) this percentage drops significantly.
The Quest for Alpha surveys carried out by Daniel Wessels of DRW Investment Research clearly indicate that South African active managers, such as unit trusts, struggle to beat the benchmark (index returns) over time and show a significant lack of consistency in performance over periods of three to 10 years.
Accordingly, your reader will significantly increase his risk of underperforming the market and incurring much higher costs in doing so if his active manager "churns" the portfolio in a search for the elusive alpha (outperformance).
Global research indicates that the optimal strategy is to allocate 70% of a portfolio to index investing (beta) and only 30% to active investment (alpha) for long-term investors (ie 10 years), as in the case of your reader.
The reader might look to spreading his passive investment among other asset classes and indices by looking at ETFs other than Satrix.
There are now 40 ETFs/ETNs (exchange-traded notes) listed on the JSE, which offer a variety of passive investment options and allow for the passive portfolio to be spread among different asset classes and investment styles.
- Fin24
I have approximately R450 000 in the Satrix 40 exchange-traded fund (ETF). This is purely for investment and capital growth.
Would it be prudent to move to a stockbroker or portfolio manager who can actively manage this cash over the next 10 years, in the hope that this will show better growth than at present?
We asked Chris Wehmeyer, portfolio manager at PSG Konsult and Mike Brown, managing director of ETF platform www.etfsa.co.za, to respond.
Chris Wehmeyer of PSG Konsult:
The nature of an investment in an actively-managed share portfolio compared to investing in Satrix differs markedly.
Satrix 40 ETF is a basket of the largest 40 companies on the JSE with the aim of tracking the Alsi 40 index.
A disadvantage of investing in Satrix 40 ETF is that 50% of the Satrix portfolio consists of resource and mining companies; should the resource sector underperform over a protracted period, the Satrix 40 ETF would underperform the broader market.
The total market capitalisation of the Alsi 40 index is used to weigh the company in the index.
Therefore you find excessive weightings of companies such as BHP Billiton (16%) and Anglo American (12%) in the ETF, which may increase the risk of the portfolio should something go awry at one of these companies.
An individual share portfolio is an active way of investing in the market with the aim of outperforming an investment benchmark index such as the All-share index.
It is also a more flexible and transparent way of investing in the JSE to suit the investor's own unique requirements. Investors can easily adjust their portfolios to changing market conditions, without the rigidity of an index fund.
The portfolio manager will construct a portfolio according to his strategy and that could include buying companies with high dividend yields and growth stocks, or buying companies that are undervalued.
Actively managed funds are more expensive to maintain as management fees and brokerage would be between 1% and 2% annually, compared to Satrix annual fees of 0.8% plus adviser fees of 1%.
It is important to find a reputable stockbroker to manage the portfolio.
Mike Brown of www.etfsa.co.za:
The investor has invested his money in Satrix, a passive investment instrument that benchmarks the main JSE indices. Satrix products provide the average return of the stock market, which is what indices do.
Research indicates that only a small percentage - 20% to 30% of active managers - outperform an index over time, before costs. After costs (including stockbrokerage, custodianship, management, advisory fees, etc) this percentage drops significantly.
The Quest for Alpha surveys carried out by Daniel Wessels of DRW Investment Research clearly indicate that South African active managers, such as unit trusts, struggle to beat the benchmark (index returns) over time and show a significant lack of consistency in performance over periods of three to 10 years.
Accordingly, your reader will significantly increase his risk of underperforming the market and incurring much higher costs in doing so if his active manager "churns" the portfolio in a search for the elusive alpha (outperformance).
Global research indicates that the optimal strategy is to allocate 70% of a portfolio to index investing (beta) and only 30% to active investment (alpha) for long-term investors (ie 10 years), as in the case of your reader.
The reader might look to spreading his passive investment among other asset classes and indices by looking at ETFs other than Satrix.
There are now 40 ETFs/ETNs (exchange-traded notes) listed on the JSE, which offer a variety of passive investment options and allow for the passive portfolio to be spread among different asset classes and investment styles.
- Fin24
