Any attempt to bring the stock market closer to the man on the street and turn markets into truly popular social institutions has to be regarded as a boon. In a country like South Africa, with a high proportion of low-income earners and alarming levels of illiteracy, it is essential that such investment and education tools have a low entry barrier and are cost-effective and simple to understand.
One popular method of gaining entry into the market is an index tracking fund, such as the range offered by Satrix. A joint venture between the JSE Securities Exchange and Gensec, Satrix is a traded instrument that gives an investor exposure to the JSE’s three main indices: the Top 40, through Satrix 40, the Industrial Index, through Starix Indi and the Financial Index, through Satrix Fini.
An index tracking fund allows you to buy the range of shares in the index for a relatively small amount. Satrix offers investments for a lump sum of R1 000 or monthly payments of R300, with a plan to decrease this amount and target pool savings such as stokvels. The monthly payments would not even buy you a single unit of some of the stocks you enjoy exposure to. Yet in making these investments, even new entrants must remember that the game needs patience and a bit of luck.
From its November 2000 listing price of R7,70 a share, Satrix now trades at just less than R9, a profit of just more than R1 a share and a reminder that the stock market is not a place for short-term investment. Its peak price was R11,50 in April last year.
The biggest benefit of an index tracking fund is passive management of investments for those of us who are frightened by stampeding bears and bulls. Passive management offers the benefit of lower transaction costs, as no active management fee is charged. But it also appears to place your returns on a level that may not be the best, but better than most. An American study found that in the three years to the end of last year 61% of equity funds on the S&P 500 that are driven by growth performed below the index. For growth-driven mid-cap funds, the figure is 87% and for small cap 81%.
The South African picture has been less rigorously tested, but Satrix has found that over three years 30 out of 40 funds, or 75%, performed below the JSE All Share Index. The figure over five years show a similar trend, while over 10 years 46% of funds were beaten by the market.
The trick is to choose the fund that beats the market over the long term, failing which you can just track an index.