WORLDVIEW: Interpreting impact on two JSE stocks of war between investment models

By Alec Hogg.When it comes to growing wealth, sentiment doesn't count. Only the returns matter. So for most of us, the war of words between active and passive investment managers is of little more than passing interest. But for those in the kitchen, it's existential..Active asset managers are finding it increasingly difficult to defend a business model built for a different era. Low inflation of recent years has resulted in lower returns. That, in turn, amplifies the impact of costs on net performance. A couple percentage points in fees becomes a lot more relevant at average annual returns of 6% than they were during the high inflation period where 15% was the norm..___STEADY_PAYWALL___.Over the weekend, highly rated active UK money manager Aberdeen, showed just how badly it has been exposed to this changing tide. The once fiercely independent house which has been looking for buyers for some months, has agreed to be absorbed into its fellow Scottish rival Standard Life, signalling its actively-managed model has run out of road..The seeds of Aberdeen's reversal were planted only 43 years ago by John Bogle, founder of US-based index fund specialist Vanguard. Bogle rationalised that if he could automate a way for a portfolio to mirror the major stock market indices, it would deliver an irresistible advantage. In any one year, only half the asset managers can beat the index. Overlay their higher costs and Bogle's invention would, logically, consistently beat most of them..What started as a ripple in 1974 has become a disruptive tsunami for active fund managers. Investors have finally seen through the marketing and have been switching money into passive index funds at an increasing rate. Active money management, a field which used to be among the most profitable in financial services, has been well and truly disrupted..Aberdeen's capitulation is the end of a spectacular entrepreneurial journey for CEO Martin Gilbert who co-founded the business in 1983 when he bought a local investment trust for £50m. The firm mushroomed through numerous acquisitions. In terms of the deal, is being valued at £3.8bn – one third of the merged entity which overtakes Schroders to become the UK's biggest fund manager (and number two in all of Europe)..That's quite an achievement. But had Gilbert and his colleagues seen the active management writing on the wall earlier, they'd have done even better. Two years ago the Aberdeen share price traded at 490p. But with operating profit margins tumbling (from 45.4% to 32.6% in three years) and 15 consecutive quarters of net fund outflows, its managers are happy to be getting a price of 286p. Such are the travails of the disrupted..South Africans are up with the action here as you can see in the relative ratings of the JSE-listed active manager Coronation Fund Managers and its passive competitor Sygnia. Coronation trades at a dividend yield of 6.6% – exactly double Sygnia's. But of the two, given how quickly disruption grabs hold, I'd be with the passive play, especially now that the price has lost 30% from the post-listing-hyped peak of a year ago.

WORLDVIEW: Interpreting impact on two JSE stocks of war between investment models

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