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Collective Investments
Wednesday, June 1, 2005
Active plus passive….

Latest unit trust figures are a sharp reminder to investors of the value of diversification across different investment philosophies, says Stanlib.
In this respect there are two principal philosophies to consider, active and passive: the active fund managers try to do better than a benchmark such as the JSE All Share Index; while the passive fund manager simply matches the composition of an index so that he performs in line with the market.
Active management requires expertise and research: passive management involves little switching, keeping costs low. The latter was popular during the record US Bull Run, for instance, as investors enjoyed upside year after year. But when markets gyrate, decline or stagnate, “buying the index” loses some appeal.
In South Africa in recent years, astute active managers have significantly out-performed key indices. However, recent unit trust figures underscore the advisability of retaining some exposure to passive investment via index funds.
Stanlib’s Dylan Evans (director, institutional and investment marketing), notes, “In the Domestic Equity General sector, index funds were the top performers in the first quarter of 2005. The Stanlib Index Fund achieved a 6,21% return while the mean Domestic General Equity Fund rose just 1,59%.
“After two years of out-performance from Financial and Industrial shares, most active managers were wrong-footed by the dramatic out-performance of resource stocks in the first quarter. In the March quarter, the mean fund in the Domestic Equity Resources and Basic Industry Sector rose 11, 17%, while the mean fund in the Domestic Equity Financial sector rose 0,99%, and the Industrial mean fell 0,59%.
“This will re-ignite arguments about active and passive investment. Index fund proponents argue that active managers can’t out-perform the index forever. On the other hand, active managers insist they out-perform for long periods.
“The fact is, there is a role for both in any well diversified portfolio.”
Active managers can log some impressive gains over time. Over three years, the mean Domestic Equity Value Fund rose more than 122% compared to a 28% rise in the Stanlib Index Fund. The concern is the tendency for active managers to come short all at once.
As he explains, “Active managers are sensitive to peer group performance and look over their shoulders to see where their competition is. It should be no surprise to investors that from time to time most are involved in multiple ‘pile-ups’, as they were in the first quarter of 2005. An active investor who has to sell during this period locks in under-performance.
“On the other hand, index funds keep their eyes on the road and avoid a pile-up as they are not bothered about the competition.
“So by blending index funds and actively managed funds you obviously reduce risk and add stability.”

Copyright © Insurance Times and Investments® Vol:18.3 1st June, 2005
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