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Active versus passive

Jun 22 2010 08:42

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The debate has raged for a long time and will probably never be resolved.

But it goes to the heart of comparisons between ETFs and unit trusts, including costs and performance.

What sort of investment product should investors be looking at: a passively managed index tracker, such as an ETF, or an actively managed unit trust fund?

Not surprisingly, Mike Brown, MD of etfSA.co.za, questions the “high cost and risk” of unit trusts.

Based on the Association for Savings and Investment performance survey of the collective investment scheme industry for the period to end-December 2009, Brown argues on his website an ETF such as the Satrix 40 outperforms the vast majority of actively managed domestic equity unit trusts over time periods from six months to five years.

Brown says the comparison establishes that “93.1% of the 436 equity unit trusts available to the South African public underperformed the Satrix 40 over the past six months; 84.5% underperformed Satrix 40 over the past year; and 89.2% underperformed over a five-year period”.

The problem with comparisons such as these is the time periods covered, though Brown’s argument does look quite convincing.

But respective time slots covered would have included the earlier market meltdown and the strong resurgence, led by resource shares, where for six months or longer no active manager could match the resources-heavy Top 40 index.

However, Brown says the survey only includes total expense ratios (TERs) of unit trusts and ETFs and not other charges related to unit trusts.

“Given that those fees are significantly higher for unit trusts than ETFs, the actual after-costs or net performance of the unit trust industry is even more disturbing.”

He concedes the comparison might be distorted by the inclusion of unit trusts with relatively low equity content, but the same comparison between Satrix 40 and domestic general equity funds yield similar results.

But Tamas Kulcsár, an investment analyst at Sanlam’s Glacier, disagrees.

“Odds are that investing in a passive index fund is unlikely to get you as financially healthy as proponents of the strategy would have you believe. For investors to gain and maintain true financial health – that’s wealth – an investment portfolio needs to be actively managed.”

Apart from being “boring”, Kulcsár says a passive approach has some underlying problems for investors.

“It doesn’t necessarily reduce portfolio risk, as asset allocation – the most important investment decision – primarily drives returns and risk. Investors are also faced with having to decide which index they want to use.”

He acknowledges Satrix ETFs as providing exposure to a variety of equity indices at a reasonable cost but says the main problem with a pure index fund is that most indices in SA are market-capitalisation weighted.

The result is that as securities become more expensive an index fund buys more.

As they get cheaper an index fund sells.

“On the other hand, active managers can position their portfolios to stocks and sectors that either show better long term value or that have a lower potential for significant capital loss.”

That won’t be the final word in this long-running debate and presents investors with some tough choices.

 - Finweek
mike brown  |  investment  |  etfs
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