Are investors paralysed when it comes to picking index-related investment opportunities? Paul Stewart, managing director of Plexus Asset Management, finds the trend towards cost-effective, index-related investment to be muted in South Africa, suggesting investors here still find actively managed products more palatable. Market penetration remains below expectation and global averages.
There are many different index options — ALSI, SWIX, Top 40, Value, Growth, DIVI and RAFI — and investors might rightly be asking which index will best meet their specific investment requirements.
As at February 28 2011 the average general equity collective investment scheme (CIS) fund in South Africa underperformed the headline FTSE/JSE All Share Index (ALSI) by 3,3% over the past year and 4,3% a year over the past two years. Over three years, the average equity fund added a small 0,5% a year above the index.
“This three-year number is surprisingly low, since equity funds can hold up to 20% of their assets in cash to protect investors from downward movements, such as those in the 2008 global credit crisis,” says Stewart. “If one looks at these relative numbers from a fund manager’s perspective, the picture is even more interesting. Most South African fund managers have argued that the heavy bias in the FTSE/JSE ALSI towards a few large dual-listed commodity shares is inappropriate. The FTSE/JSE Shareholder Weighted Index [SWIX] evolved from this dialogue,” he says.
The SWIX downweights the large dual-listed shares on the JSE to something that is a better proxy for an actual investible universe, which most fund managers now prefer as their benchmark. That said, the average general equity fund underperformed the industry-preferred SWIX in all three periods by 1,2% over one year, 3,0% a year over two years and 0,5% a year over three years.
“Clearly there are several equity funds that beat these indices, but selecting these funds consistently on an ex ante basis is no easy task,” says Stewart.
The FTSE/JSE Dividend Index (DIVI) has delivered 15,5% a year since March 1 2008, an outperformance of 11,2% a year over the ALSI and 10,2% a year versus the SWIX. “In the long run, a dividend-only investment strategy may not be appropriate for everyone, but it certainly has application and merit,” Stewart says.
According to Stewart, with the introduction of so-called “smart beta” equity indices in the past few years, the future of index investing has finally changed significantly for long-term core equity investors.
“These indices are designed to retain the benefits of traditional indexation (low cost/turnover and broad market exposure), but avoid the inherent pitfalls of market capitalisation indices by not using share price as the determining variable to weight companies in the index. These fundamental indices™ have been shown to produce better risk/reward ratios and have seen major traction globally, with over $1-billion per month currently flowing into these indices,” he says.
In South Africa, two fundamental index™ options are available. The FTSE/JSE RAFI™ Index and the Plexus eRAFI™ Index. Smart Money has looked at the RAFI in some depth: click here.
All index data quoted are gross returns with dividends reinvested.
Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information