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The bottom line in any investment is how it performs for you, the investor, and that performance includes consideration of all fees and expenses. With a heavily loaded fund, you start your investment with a significant loss. Avoid unnecessary charges whenever possible.
A low cost-efficient Regulation 28 (pension compliant) tracker fund offering high long-term growth and worthy of consideration is the Old Mutual Core Diversified Fund managed by Cape Town-based Frank Sibiya of Old Mutual Investment Group.
Co-portfolio managers are Shariefa Parker and Bernisha Lala.
Indexing, of course, has become a major force in financial markets since John Bogle, founder of the US-based Vanguard Group, launched the world’s first equity index fund in 1976.
It seems barely conceivable now that it nearly failed at birth, raising just $11m at its initial public offering instead of its $150m target. But, since then, tracker investment strategies based on indices have spread to every asset class amid growing recognition that active managers too often fail to deliver on their promises to beat a benchmark.
The shift towards indexing is a worldwide phenomenon, says Sibiya, who is responsible for managing both local and international tracker funds at Old Mutual Investment Group. “Tracker funds are a sensible alternative to active investing, offering several important benefits to investors. It’s a big misconception that, because markets are not efficient, you need an active manager to capitalise on the opportunities presented.
“True, investor preference is generally for active funds, but it’s been conclusively demonstrated in most capital markets worldwide that active managers on aggregate don’t provide consistently superior returns to the indices they aim to beat.”
Tracker funds can act as a reasonable proxy for most conventional markets, enabling investors to extract the equity risk premium, he says. “Balanced funds in particular provide wide diversification throughout the market sectors. They also keep trading and other costs down, which often erode returns generated by fund managers who transact very actively.”
Sibiya concedes that active managers research shares and respond to new information such as earnings announcements, leading to share prices moving in response to them.
But equally, he points out, research published last year by Bank of America Merrill Lynch found that US firms ranked in the top-fifth percentile of Environment, Social and Governance Ratings (ESG) between 2005 and 2010, experienced the lowest levels of volatility earnings per share in that five-year period. By contrast, companies which ranked the worst in terms of their ESG rating experienced the highest levels of volatility.
“In line with these findings, the analysis of ESG characteristics to anticipate future volatility lends itself strongly to index investing, particularly among investors who are mandatory holders of the index. Indexation managers, however, need to ensure that their holdings adhere to the principles of responsible investment, as they are unable to take an active approach to holding certain companies.”
The Old Mutual Core Diversified Fund is a passive fund with an underlying R240m capitalisation, exposed primarily to the JSE Capped Shareholder Index (Capped Swix) which is a fair reflection of the investment universe available to the South African investor. The Capped Swix has a 52% strategic weighting in the fund.
The principal equity holdings at present comprise Naspers* 3.3%, Growthpoint Properties 1.9%, Sasol 1.8%, Standard Bank Group 1.6%, and Redefine Properties 1.4%. In addition to the broad local equity market exposure, the fund has exposure to SA listed property which has a strategic weight of 6%.
The international equity exposure is invested in the MSCI ACWI ESG Index, with a strategic weighting of 20%. It offers exposure to both developed and emerging markets globally.
Diversification away from equities comprises exposure to nominal bonds via the JSE All Bond Index (ALBI), with a 7% strategic weighting and JSE IGOV Index (inflation-linked bonds) of 6%.
Annualised fund performance at end-July was 5.4% over three years and 4.9% since inception. This was largely in line with the benchmark. The fund boasts 53.7% positive months since inception and a maximum drawdown of 5%.
*finweek is a publication of Media24, a subsidiary of Naspers.
This article originally appeared in the Fund Focus supplement in the 13 September edition of finweek. In the print version of this article, the Old Mutual Investment Group graph was incorrect. We regret the error. Buy and download the magazine here or subscribe to our newsletter here.
