Passive investing ‘not most intelligent strategy’ for 2017, says SA expert

Mark Lindheim
Mark Lindheim

Passive investing has taken off in recent years as investors cotton on to the fact that active fund managers just can’t beat these portfolios. Usually lower cost, passive investments track indices that active fund managers also use as portfolio benchmarks. Passive investments like exchange traded funds and mutual funds, or collective investment schemes, that explicitly aim to match indices have cannibalised the fund management industry, which sells its expertise in selecting investments. So, it’s in an active manager’s interests to downplay the benefits of passive investing. Mark Lindheim, chief investment officer at Investment Solutions, is arguably talking his book when he publicly dissuades investors from opting for passive investment funds in the shorter term. However, he has a point that passive funds do fall when the markets do. The good news is that markets eventually rebound. Provided you are patient, you can’t go wrong with a passive investment. Nevertheless, if you do need the money within the next two years or so, proceed with caution. As Lindheim notes: the markets have generally been on an upward trend for not far off a decade and all good things must come to an end. – Jackie Cameron

By Lameez Omarjee

Johannesburg – The world’s current uncertain environment contributes to a higher risk, which is influencing investment returns, but there are still opportunities to earn returns, and investors need the appropriate strategies to assist them.

That is according to Mark Lindheim, chief investment officer at Investment Solutions, who was speaking at a media briefing on the way forward for investors in an uncertain environment on Monday.

etf active passive“Chasing high returns is not the right way to go about it,” said Lindheim.  In recent months, there have been capital flows to emerging markets, mostly due to foreign investors searching for yield. But these high yields come with risk, he cautioned.

Investors should instead take a risk management approach. This involves taking a multi-strategy approach to create a diversified portfolio to mitigate risk, he explained. This will ensure investors can get some return, even when markets are flat.

He also added that simply going for a passive investment strategy, which worked following the global financial crisis in 2009, is also not the most “intelligent strategy” for the next few years. “It’s been eight years since the last market correction. Markets are due for another correction at some point in time,” he said.

Passive investments are likely to fall when markets do. It would be better to combine passive, low cost strategies with active investment. This is a multi-strategy approach which will combine traditional investing with alternatives such as hedge funds.

Further investors need to have a global perspective. “Our market is tied to what global markets do,” he said. Considering offshore investments, Lindheim explained that research shows it is reasonable for South African investors to have a share of 20% to 35% offshore.

Also read: Active v Passive – bah. Here’s the real debate money managers really should be debating

There are things globally, which cannot be acquired in South Africa. “Global technology is more advanced than in South African technology.” Global investing is important for that kind of exposure, he added.

Global movements

The global environment is seeing the end of quantitative easing and the beginning of fiscal stimulus, especially in the US, China and Japan, said Adam Bulkin, head of the global portfolio team.

donald_trump_presidentFiscal stimulus in the US will see President-elect Donald Trump spend $1trn on infrastructure in the next 10 years. This will contribute to the economy’s growth. This will see the US GDP at 3.5% as opposed to the 2.5% we have been used to, explained chief economist, Lesiba Mothata.

Trump is also looking at directing fiscal spend to private public partnerships to stimulate growth. Markets will look favourably on this. However, Lindheim explained that although Trump’s presidency looks good for markets in the short term, investors should still be mindful of the long term.

Currently, global bond yields are rising, but they will remain low. This low return environment, for both bonds and equities, is expected to continue for a while, added Bulkin. – Fin24