Passive (or index) funds were first introduced in the 1970s as a way to provide individual investors with access to funds reflecting widely recognized benchmarks (or indices). Since its inception, indexing has grown considerably and is now used by all types of investors and traders across the world.
Indexation, widely used in the form of a mutual fund and also AND F, is a method of tracking a general market index or a segment thereof, thereby replicating the performance of a designated index. These “tracker funds” are investable, appropriate, transparent and measurable. Two major risks for generating returns on investment are emotion and costs; index funds to a large extent mitigate some of these risks. As with active and passive SICAVs, ETFs can also be indexed or not.
Indexing is easy, and the possibilities today are almost endless; they can offer an investor diversified exposure to hundreds of stocks or bonds, local and / or international, and often at a very low price. In the case of ETFs, some ETFs available to the investing public are concentrated in sectors, themes or may even follow active security selection. Others are passive or follow the principles of broad stock market indexation. There are around 10,000 ETFs around the world and within each asset class there are hundreds of ETFs providing access to different countries, sectors, factors such as value, quality, growth and market capitalization.
OMBA Advisory & Investments, a specialist London-based ETF manager, was among the first to exclusively use ETFs to build portfolios. “In the current climate, you can’t just hold cash because most central banks keep interest rates too low to keep up with inflation. Even when interest rates have been higher, stocks have the best track record for beating inflation over the long term. Equity ETFs benefit from the dynamism of global financial markets, with the best performing companies rising to the top of the world’s major stock market indices, ”said Adam Rudd, Senior Portfolio Manager at OMBA.
Index AND F you don’t have to make active decisions to increase your exposure to emerging companies to track their benchmark, as they automatically turn to those companies as the index rebalances. “They are less skill-dependent than active funds, which on average also tend to underperform their benchmarks,” adds Rudd.
OMBA, however, believes that there is a place for skills in the investment process and that they don’t just hold the passive benchmark. They actively manage clients’ asset allocation and select the most suitable ETFs to express their investment views on allocation by country, sector and theme. Rudd is also cost sensitive with its operating model focused on efficiency and automation to improve long-term returns for clients. “Having a well-constructed portfolio of stocks, corporate bonds, government bonds, real estate, commodities and currencies is one of the surest ways to increase the real value of your money. ETFs have had a transformative impact on our industry. We appreciate their elegant simplicity and want more people to benefit from the cost savings, diversification and liquidity they offer, ”he said.
Check out OMBA details on FUND HUB, where you can access the full video interview, fact sheets and contact details: https://fundhub.co.za/asset-manager/omba.
Casparus Treurnicht is the portfolio manager of the Gryphon All Share Tracker Fund, which has been in existence since 2002 and has the longest performance history of any fund that pursues an index approach to generate performance. Gryphon’s All Share Tracker Fund offers benchmark performance using a methodology called sampling. Their sampling process filters out all components of the index and selects only those sufficiently liquid to be included in the fund. If a meter is not liquid, investors may incur an additional cost in the form of an impact on the market when these illiquid meters have to be bought or sold. “Trading in stocks in an index fund only makes sense if you can get the price that’s prevailing at that time. The impacts on the market can cause you to increase / decrease the price unnecessarily when the flows have to be processed ”, explains Treurnicht.
Griffin places a strong emphasis on credit quality and a prudent approach to fund management. “We believe there are obvious gaps in the market that sometimes need to be avoided. We will not consider companies that are not considered prudent investments, including companies such as Steinhoff and African Bank more recently. Our process takes this into account by keeping sector exposures neutral, ”adds Treurnicht. He believes this gives them the opportunity to deviate from market performance due to sampling and, therefore, not to be exposed to illiquid companies. Treurnicht believes that in the longer term, their performance will be improved compared to funds following a simple indexation approach.
The benchmark of the Gryphon All Share Tracker Fund is the total return of the South African All Share Index. “Our preference is for a broad benchmark which generally outperforms ‘tailor-made’ market benchmarks over the long term and which perfectly captures the advantages inherent in indexation. As indexing automatically increases and decreases the weight of the index components to its broadest extent, these inherent efficiencies are what make indexing attractive. Market indices with fewer components would suffer from the exclusion of a winning stock in its early stages, ”he adds. Likewise, this could also apply to the contribution of a company with a very large market capitalization.
Treurnicht believes that, compared to active funds, the advantages of indexation are obvious from a cost and performance perspective. “Index funds are outperforming most active peers over a 3, 5 and 10 year period at any given time. “
“One should be aware that when allocating to ETFs additional costs are involved, such as platform fees, trading fees and bid / offer spreads which can erode the benefits of this type of class. indexed investment. ” Treurnicht concludes: “Most investors would be better off investing in an indexing unit trust fund following a broad market index and forgetting about it”.
Check out the details of GRYPHON on FUND HUB, where you can access the full video interview, fact sheets and contact details: https://fundhub.co.za/asset-manager/gryphon.
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