27 Feb 2016

Active vs Passive Debate

There is an ongoing debate within the investment industry. Do you choose indexed (passive) investing or do you choose active investing?

  • Indexed investing seeks to replicate a basket of shares, such as the 40 largest shares on the JSE. So you don’t pick which shares to buy – you buy all the shares specified in the basket (called an index).
  • The alternative is called active investing where the investment manager picks certain shares and steers clear of others.
  • The investment results are counter-intuitive. Typically only 1 in 5 active funds beats an index fund. And these results are broadly consistent across different countries.
  • Why? The key reason for this is costs. Before costs, the indexed investor gets the average return of the basket of shares because it buys the basket. In theory, half the active managers will beat this average return and half will fall short. Its a zero sum game. But that is before costs. After costs indexed beats a lot more than half the active manager because active managers fees are much much much much more than indexed fees. And as Hilton Tarrant wrote yesterday: with low returns, there’s one thing you can control.

So, in our opinion, there is no debate.  Warren Buffet recommends index investing. Many others experts have also been advocating indexed investing for decades.

Our Prescient Portfolios use index investment strategies to give you diversified exposure to the asset classes (equities, bonds, etc.) at a low cost. We have asset class portfolios and also three Reg-28 risk profiled portfolios:

  • high equity (target 75% equity exposure)
  • balanced (target 50% equity exposure)
  • low equity (target 25% equity exposure)