“In South Africa, where equity market returns have been disappointing over the last five years, investors have acknowledged the need to diversify across asset classes and geographies without jeopardising long-term gains,” says Wehmeyer Ferreira, Executive Director of specialist index tracking provider 1nvest, a collaboration between Standard Bank, Liberty and STANLIB.
Consequently, passive investment products such as Exchange Traded Funds (ETFs) and index tracking unit trusts are gaining momentum, as they provide a cost-effective and efficient way of achieving diversification and reducing overall risk in an investment portfolio.
An affordable avenue to diversification
Because passive funds track a benchmark or index and are not based on a fund manager exercising discretion, they can be delivered at lower fees than actively managed funds. For example, investors can access the 1nvest Top40 ETF for a 0.25% management fee per annum.
Ferreira explains: “The Global Financial Crisis (GFC) triggered a series of events that put fees under the spotlight. Firstly, it created distrust between institutions that form part of the financial system and the man in the street that buys financial products. Secondly, we entered an environment globally where yields and returns across asset classes were lower than ever before. And thirdly, increased regulation forced more transparency on disclosure, especially around fees.”
These three events were the main drivers behind fee revolutions and the rise of passive funds globally over the last 10-12 years.
Access to different exposures
While the passive investing market is still small in South Africa, the country has experienced a boom in new ETFs and index tracking unit trusts. 1nvest offers a comprehensive range of
top-performing, easily accessible ETFs and index tracking unit trusts that investors and their financial advisors can utilise to create or enhance a portfolio. This selection includes funds that provide access to multiple asset classes such as equities, fixed income, property and commodities.
“With lacklustre returns from the local market and heightened risks to the domestic environment, geographical diversification has become essential. Increasingly, investors are allocating a larger portion of their portfolios to offshore,” Ferreira notes.
“We saw more than ZAR22-billion of 1nvest commodity ETFs trade on the JSE by end-2020.”
It has become much easier nowadays to access offshore markets using index tracking funds. 1nvest’s funds rewarded investors in 2020, with the 1nvest S&P 500 Index Feeder Fund returning 22.33% during the year. The 1nvest MSCI World Index Feeder Fund returned 21.56% while the 1nvest Global Government Bond Index Feeder Fund returned 14.50% during the period. Ferreira says that, “products range from very well diversified asset class exposure, like the 1nvest MSCI World Index Feeder Fund, to very niche, like the 1nvest S&P 500 Info Tech Feeder Fund”.
Globally, and in the US specifically, the technology sector has emerged as the dominant driving force behind the performance of equity markets. This is reflected in the performance of the 1nvest S&P 500 Info Tech Index Feeder Unit Trust, which returned 48.31% in 2020. “We have seen a marked increase of use of the 1nvest commodity ETFs by our clients wishing to invest and trade precious metals,” Ferreira explains. “We saw more than ZAR22-billion of 1nvest commodity ETFs trade on the JSE by end-2020.”
The 1nvest Rhodium ETF, which is currently the only one of its kind on the African continent and one of two in the world, returned a remarkable 187.14% to investors in 2020 – up from 140.9% in 2019. Over the last three years, it delivered an annualised return of 124.96%.
Lowers the risk of underperformance
The shift to passive investing, Ferreira says, has been aided by the struggle of active fund managers outperforming the benchmark through a cycle.
“The lack in persistence and predictability of outperformance has created headaches for fund allocators and advisors as they need to spend a disproportionate amount of time reviewing fund managers and performance.”
This is not to say that there isn’t a place for both active and passive strategies in an investor’s portfolio.
“Index exposure can coexist with active funds. Increasingly, clients are adding passive exposure in their portfolios to enhance their overall outcome. This allocation will depend on the person’s individual circumstances, such as investment time horizon and appetite for risk.”