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By Helena Conradie*
I think there is some confusion here, and all the glory is being bestowed on ETFs when in fact the fascination is actually with indexation as a whole, despite the product you choose to invest in. I’ve recently experienced this first hand while attending the CFA Institute Annual Conference in Philadelphia where John Bogle (founder of Vanguard) was the revered keynote speaker. I realised again that what was once mockingly referred to as “Bogle’s folly” is now a firmly entrenched investment strategy – now that’s true disruption! By now, if you’ve been following this series of articles, you will know that index tracking is cheaper than active management. It has also become increasingly difficult for active managers to outperform the indices they try to beat – so perhaps just buying the index if you’re a long term investor is the way to go.
But why are these two factors making investors sit up and take notice of index tracking, and why now? You’ve probably seen many articles written over the past few years cautioning that your returns are going to be lower going forward. Although most analysts may have been premature in this prediction, it really seems that this time is now upon us. The past 30 years have been a hey-day for global asset class returns. Inflation declined precipitously and real interest rates fell to levels we have not seen before. Favourable demographics saw a rise in the number of people of working age and thus an increase in employment. Productivity also grew as the pendulum swung from agricultural pursuits towards manufacturing and services. Increased automation allowed nimble businesses to steal market share from competitors making big contributions towards global GDP growth. And all this while corporates were able to elevate after tax profits by taking advantage of the growing global consumer, especially in emerging markets. This saw bond and stock market returns surge.
Read also: Satrix shares…are ETFs really that cheap?
Currently we are sitting at a watershed where it will be difficult for inflation and interest rates to fall further. In some instances, countries already have negative real interest rates. An aging world means the working pool is shrinking which is stalling employment and corporates are facing a far more competitive environment than before, fuelled largely by technology. All of this leads to lower asset class returns which means investors need to adapt their expectations about investment returns. It also means they need to be more nimble about their investment choices.
One way to do this is to seek out cheaper alternatives to active management with no performance compromise – hence the increase in money flowing into indexation.
If you take anything away from our series, it really is these last few points I’d like to share with you –
- Investing isn’t gambling. There are returns you can expect for a level of risk you are willing to take if you do the time (revisit Satrix shares…why are you investing anyway?). There are no guarantees, but if your decisions are considered and informed, the odds are in your favour. Use what you now know about indexation and make informed choices.
- Index tracking is 100% transparent. If you know the index your fund is tracking, you know exactly what shares you are holding in real time. This means that you can hone your investment decisions to a target. There are so many different index funds available that any slice of the market you wish to invest in (whilst excluding the rest) is probably possible. This acute and targeted exposure means you have more control over the outcomes.
- Smart beta allows you to buy cheaper alpha. Alpha is the outperformance from those active managers who have proven over time to have a high probability of beating the market. But a substantial portion of any active fund’s returns is simply a result of being invested in the market – this is beta. Vanilla index-tracking allows you to access this beta portion of your portfolio at a lower cost. In addition smart beta portfolios allow you to access some of this alpha through factor investing, again at a lower cost. (Revisit Satrix shares…what is smart beta?)
- Access – for too long investing has been shrouded in mystery (and costs). Many still believe it is only the domain of the super wealthy. This is absolutely not the case. Anyone can play. One thing index tracking managers globally seem to agree on (as do we) is that investing needs to be democratised and opened up to anyone through online access, low costs and in the case of www.satrixnow.co.za , no minimums. Satrix has made sure that if you want to save and invest, there really are no more excuses.
This is the last in our series of eight articles and I do hope you’ve come along with us and now feel confident enough to start your own investment journey. No one is going to look after your money better than you will and whether this means learning the tricks of the trade or finding someone to guide you doesn’t really matter as long as you set the plan in motion. As I have said many times before, to do nothing is also an active decision.
Thank you for your time. Don’t delay, your money is waiting. #JUSTSTART.
- Helena Conradie, CEO of SATRIX
- Satrix Managers (RF) (Pty) Ltd is an authorised Financial Services Provider and a registered and approved Manager in Collective Investment Schemes in Securities and an authorised financial services provider in terms of the FAIS Act. The information in this article does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. Collective investment schemes are generally medium- to long-term investments. Unit Trusts and ETFs the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to it being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The index, the applicable tracking error and the portfolio performance relative to the index can be viewed on the ETF Minimum Disclosure Document and/or on the Satrix website.