Tuesday, 03 September 2013 - 20:00
Seed weekly - Active and Passive Investment Strategies
Monday’s Business Day had an article on passive investing, with the headline “passive investment relies on getting a free ride from active managers.” The basic emphasis of the article was - only because active investors are performing an invaluable service of price discovery, can passive investors essentially ride on their coat-tails. The article points out, and quite rightly so, that “If the whole world were investing passively, prices would not move.”
Let’s take a cursory view of active, passive, and smart beta managers.
Investopedia defines active management as the use of human element to actively manage an investment portfolio, through the use of analytical research, forecasts, judgement and experience, deciding which shares to buy, hold and sell and in what proportions.
The underlying premise that drives active management, is that market prices are not absolutely efficient and so, by employing human skill and ingenuity, a portfolio of shares can be constructed which will outperform a simple index. Investors making use of active management want to capture both beta (i.e. the market returns) and alpha (the additional performance that the manager is able to achieve).
A passive investment management strategy is one where a portfolio of shares is constructed by mirroring an index. Two further subsets of this strategy are – Market Cap Weighted and Smart Beta.
The traditional index – such as the FTSE/JSE All Share index is constructed on the basis of market capitalisation, or relative size of the underlying companies, so that a large company such as Billiton has an 11.8% weight in the index, while a smaller company such as Goldfields has a 0.74% weight in the same index.
The underlying premise that drives investors to make use of market cap weighted index tracking portfolios is the belief that market prices are efficient and therefore over longer periods of time it is impossible for active managers to outperform, especially after taking their higher costs into account. Investors into these passive strategies want to only capture market performance, known as beta, but at low cost.
Somewhere between a pure index passive and the active management is smart beta. By constructing an index in a different manner to purely the relative sizes of the companies, a smart beta portfolio aims to provide investors with market exposure (i.e. beta) plus the ability to outperform – i.e. some alpha as well.
There are many ways in which smart beta portfolios can be constructed. Three methodologies used include:
• Equally weighted approach – this removes the link between share prices and their weights. Shares in a given universe are weighted equally in a portfolio.
• Economic weighted – here certain fundamental factors are used to weight the shares. These can include sales, earnings, dividends etc.
• Factor tilts – here the weights in the portfolio are constructed by looking at specific return drivers that are typically used by active managers when compiling their portfolios. These would include value factors such as earnings yield and dividend yield, and perhaps also momentum factors such as earnings upgrades.
Over time certain smart beta strategies have shown to deliver superior performance when compared to the pure market cap passive (read FTSE/JSE All Share index) and indeed when when compared against many active managers. All investors looking to generate returns above the benchmark, but at lower costs, should be considering a smart beta component.
The Seed Equity fund is a unit trust that tracks value and momentum factors on a passive approach (i.e. a smart beta fund). If you would like to find out more, please don’t hesitate to give us a call.
Ian de Lange
021 914 4966
Tue, 03 Sep 2013
World Markets (Spot Prices)
|JSE Top 40||17:00||38513.85||167.60||0.44%|
|JSE Indust 25||17:00||48729.55||34.34||0.07%|
|Rand / Dollar||19:59||10.3071||0.0478||0.47%|
|Rand / Pound||19:55||16.0180||0.0902||0.57%|
|Rand / Euro||19:55||13.5776||0.0328||0.24%|
|Rand / NZD||00:00||8.0377||0.0890||1.12%|
|Rand / AUD||19:55||9.3301||0.0873||0.94%|
|Yen / Dollar||19:59||99.2720||-0.0950||-0.10%|
|Euro / Dollar||00:00||0.7580||0.0011||0.15%|
|Dollar / Euro||19:59||1.3172||-0.0022||-0.17%|
|Pound / Dollar||19:55||0.6420||-0.0010||-0.16%|
Click here for the Sharenet Spot Price page
The JSE Today
* Includes all listed instruments on the JSE
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||51,582.22||55.63||0.11%|
|Oil & Gas ||36,553.84||236.11||0.65%|
|Oil & Gas Producers ||19,654.32||126.94||0.65%|
|Basic Materials ||27,337.49||337.20||1.25%|
|Forestry & Paper ||26,948.14||634.00||2.41%|
|Industrial Metals ||24,045.74||97.61||0.41%|
|General Industrials ||123.77||-.37||-0.30%|
|Consumer Goods ||52,748.51||-1.95||-0.00%|
|Automobiles & Parts ||7,898.43||-27.17||-0.34%|
|Health Care ||68,816.32||-254.63||-0.37%|
|Index Name||RP||Move||% Move|
|Food Producers ||68,237.77||207.36||0.30%|
|Personal Goods ||1,004.56||.70||0.07%|
|Consumer Services ||9,438.63||17.25||0.18%|
|General Retailers ||58,899.11||45.81||0.08%|
|Travel & Leisure ||5,461.79||-9.36||-0.17%|
|Support Services ||2,657.06||43.30||1.66%|
|Non-life Insurance ||47,011.91||-285.85||-0.60%|
|Life Insurance ||29,094.61||116.57||0.40%|
|General Financial ||2,858.87||-9.07||-0.32%|
|SHARIAH TOP40 ||3,684.10||31||0.85%|
|FTSE/JSE SHARIAH ALL||3,784.26||29||0.77%|
|FTSE JSE Fledgling ||5,771.08||49||0.85%|
|FTSE/JSE Alt X ||1,026.18||0||0.02%|
|SA LISTED PROPERTY ||481.05||-1.93%|
|CAPPED PROPERTY ||403.59||-1.86%|
|FTSE/JSE RAFI 40||8,512.89||50||0.59%|
|Capped Top 40||20,331.98||82||0.40%|
|Capped All Share||21,701.79||80||0.37%|
|JSE TABACO ||6,693.63||5||0.07%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|GRT||GROWTHPOINT PROPERTIES LI...||SELL||02/09/2013|
|MUR||MURRAY AND ROBERTS HOLDIN...||HOLD||30/08/2013|
|IMP||IMPALA PLATINUM HOLDINGS ...||HOLD||30/08/2013|
|BVT||THE BIDVEST GROUP LIMITED||HOLD||29/08/2013||
|Expected||Company Name||Fin. Date|
|04/09/2013||AFGRI||June 2013 (Final)|
|04/09/2013||EQSTRA||June 2013 (Final)|
|04/09/2013||EQSTRADA||June 2013 (Final)|
|04/09/2013||EQSTRADB||June 2013 (Final)|
|04/09/2013||MUSTEK||June 2013 (Final)|
|GRINDROD PREF||02/09/2013||19/09/2013||30/09/2013||R 3.7100|
|PSGFIN PREF||02/09/2013||19/09/2013||30/09/2013||R 3.5706|
|MTN GROUP||14/08/2013||30/08/2013||09/09/2013||R 3.7000|
|MRI||Mine Restoration Investments Ltd.||04/09/2013||Confirmed|
|CDZ||Cadiz Holdings Ltd.||05/09/2013||Confirmed|
|SSK||Stefanutti Stocks Holdings Ltd.||06/09/2013||Confirmed|
Stock Exchange News Service
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