By Alec Hogg
The Clash of the Cultures by John Bogle is one of the best investment books you’ll find. Written by the father of index investing, it focuses on how the investment game was hijacked by marketers in search of taglines. They encouraged money managers to switch from long-term investing to short-term speculation. And investors have been the losers.
Bogle writes from a position of some authority, having created the world’s first index mutual fund in 1975 called the Vanguard 500 Index Fund. His idea was to counteract “a profession once focused largely on investing (which) became a business focused on marketing.” His revolutionary approach was to mathematically replicate the major stock market indices, creating a diversified portfolio of US stocks intended to be held “forever”. Central to the concept was cutting expenses by eliminating research teams and advertising campaigns, passing the benefit on to investors through lower costs.
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He bet that the public would eventually be attracted by the higher returns his index idea was sure to generate. And they have. What we now know as “passive” investing has outperformed the old-style “active” approach. Bogle’s Vanguard is today the world’s second biggest asset management company with $4 trillion under its care, shaded only by Blackrock with $5.14 trillion. By way of context, South Africa’s annual GDP is $350 billion.
In developed markets it’s one-way traffic towards Bogle’s invention with Morningstar’s 2016 figures showing $317bn in fresh funds went into passively managed equity portfolios with $423bn leaving their active competitors. SA started passive investing 15 years after the US with the first Satrix fund. Here, too, investors are starting to appreciate Bogle’s logic. Since 2002, S&P has been keeping a scorecard measuring the performance of active versus passive funds. Its SA edition was released yesterday, and will support the momentum.
Results show the 183 actively managed equity funds in SA are performing really poorly against their alternatives – only 27.5% of them beat the JSE in the year to end 2016; just 19.9% over three years; and a modest 23% over five years. It makes sense, of course. Because in any one year arithmetic tells us only half the managed funds are likely to beat the market. Once you overlay costs, the number is certain to be significantly lower.
But what really shook me was how terribly SA-managed global equity funds performed against international benchmarks – a direct consequence of the inflated expenses they charge investors. The report found that over three years a pathetic 3.7% (one in 27) of the SA global equity funds beat the benchmark S&P Global 1200 index; and an awful 7% of them outperforming the index over five years.
The obvious conclusion: There’s some logic for South Africans to take their chances with an active manager on the JSE, as around a quarter of these funds beat the benchmark. But given their track record, supporting SA funds which invest in foreign equities equates to backing a 27/1 chance in a two-horse race. Not exactly a smart call.
