Wednesday, 18 May 2016 - 20:00
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Seed Weekly - Passive vs Active Investment Management
The age old debate pitting passive vs active investment management has raged on for decades, proliferating recently. This comes as a result of the struggles that active managers have faced in trying to outperform index benchmarks, particularly over the last five years. The trend is common on a global scale as well as in a South African context.
The conflicting views, proponents of either strategy have, attempt to explain the benefits and drawbacks of both strategies. A critical point, and to the fore of the passive argument, is the fact that over time, active managers have been shown to be unable to consistently deliver “higher returns” than the index. Given that active managers charge a “higher fee” for their active management skill, failure to outperform the index over the long term questions whether the fee is justified – i.e. should we be allocating money to active managers?
As a multi-manager, allocating money to different strategies in our funds, it is important to get this call right so that our clients can fully benefit from having the right strategies within our funds. Critical to this is understanding the merits of either passive or active investing without putting emotion into it or being married to any of the styles. Our aim is to always pick the strategy that fits best from an overall portfolio perspective, allowing us to deliver on our mandate with our clients. Factors like cost, the ability to outperform, minimising risk and capital protection are central to our analysis.
The “Passive” Argument
The benefits of passive investments are well documented in literature. What is likely most appealing from these reports is the low cost and the ability of these strategies to outperform most active managers. The Lipper survey using data up to December 2012, showed only 20% of active managers outperform the MSCI World Index over 5 and 10 year periods. Figures from the South African S&P Indices Versus Active (SPIVA) scorecard suggest that active South African fund managers, like their global counterparts, fall short when it comes to beating the index over 1, 3 and 5 year periods. A recent survey by Morningstar concluded that the expense ratio is the best predictor of future performance and with passive funds generally charging lower fees, they are expected to outperform.
Low cost funds shown to have subsequent higher 5 year Total Returns as at 31 December 2015
Source: Morningstar Research
The “Active” Argument
Proponents of active management argue that superior skill that certain managers possess can lead to outperformance over an index. Central to this is the ability of a manager to use her skill to manage downside risk. Active managers can make informed investment decisions based on their experiences, insights, knowledge and ability to identify opportunities that can translate into superior performance. Historical data suggests that active managers do better in down markets than up markets. Generally, passive investments tend to do better in more bullish markets but fall a lot more when the markets are under pressure as they realise the full downside of the markets. Furthermore, it is argued that passively managed funds have no chance of beating the index but will always lag their benchmarks by the amount of expenses and cash drag. Data used to analyse active managers is also perceived to be biased by some underperforming ‘closet’ benchmark huggers, particularly on a net-of-fee basis. These kind of managers appear more passive than active.
At points in time, there is a good percentage of active managers outperforming the index. Data from 1980 using the US market.
Source: Seed Research using Morningstar Direct
Putting it all together
Focusing on a snapshot of data at a specific point in time potentially has the danger of reaching conclusions influenced by the most recent market conditions. A sustained period of bullish markets, as experienced over the past 5 years, strongly supports the passive argument as passive strategies generally do well in bull markets. Similarly, the strength of the more skilled active managers becomes more apparent when markets face downside pressure or are moderately up. In this case, good stock selection and risk management should help to protect active portfolios from the full downside of the markets. Successful active managers therefore require both skill and breadth (number of independent active decisions made in constructing a portfolio) to outperform.
There is a place for both passive and active management, especially if one has the ability to identify skilled managers. It is clear that if passive management delivers superior or at the very least similar returns to active management, at a lower cost, there is a compelling argument to simply go this route. Depending on an investor’s needs and constraints, time horizon and market conditions, a strategy of passive, active or a combination of the two may be appropriate. The market rewards different factors at different times and it is important to deal with the facts in this regard and not just a watered-down version of what was true at some point in time in the past.
Kind regards,
Tawanda Mushore
Tel +27 21 914 4966
Fax +27 21 914 4912
Email info@seedinvestments.co.za
Seed is hiring: Visit the Seed Analytics and Seed Investment Consultants Linked In Profiles to view vacancies.
www.seedinvestments.co.za
Wed, 18 May 2016
Top News
South Africa's rand regained ground on Wednesday after tumbling more than 2 percent to within a whisker of the 16.00 mark given the declining chance of a rate hike locally and jitters over the Federal Reserve's next move. Full story
Local markets
On Wednesday, the JSE All Share rose 0.51%, with gains in financial and industrial shares offsetting losses in gold mining and resource shares. Full story |
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After splitting wins in contests on Tuesday, Democrats Hillary Clinton and Bernie Sanders head into the final stretch of a longer than expected and sometimes acrimonious battle to represent their party in November's White House election. Full storyA Nigerian teenager kidnapped by Boko Haram more than two years ago has been rescued, the first of more than 200 girls seized in a raid on their school in Chibok town to return from captivity in the insurgents' forest lair, officials said on Wednesday. Full storyTwo earthquakes struck Ecuador's coast on Wednesday, causing minor injuries and light damage in the same region where a magnitude 7.8 tremor killed more than 650 people last month. Full story |
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SA Business | South Africa's retail sales grew below expectations by 2.8 percent year-on-year in March as rising interest rates and weak economic growth. . . Full story | | South Africa's mining minister Mosebenzi Zwane said on Wednesday he had spoken to local banks that have cut links with Oakbay. . . Full story | | South Africa's Chamber of Mines said on Wednesday about half of its members were in loss-making territory as a result of. . . Full story | | South Africa's competition watchdog aims to complete an investigation into the grocery market by the end of May 2017, it said. . . Full story |
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| The chief executive of Impala Platinum (Implats) will step down in December this year after six years at the helm, the. . . Full story | | Impala Platinum (Implats) said on Wednesday that two workers were missing after a shaft collapsed at its Rustenburg mine in South. . . Full story | | South Africa's Spar Group reported a slower rise in half-year profit than in the same period a year earlier, as weak. . . Full story | | South Africa is on track to rein in its budget deficit to 2.4 percent of GDP by 2018/19 although it will. . . Full story |
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| South Africa's National Union of Mineworkers (NUM) said on Wednesday it expects wage talks with power utility Eskom to fail after. . . Full story | | South Africa's Finance Minister Pravin Gordhan said on Wednesday he did not know whether a wealthy family with close ties to. . . Full story | | South Africa's headline consumer inflation slowed to 6.2 percent year-on-year in April from 6.3 percent in March, data from Statistics South. . . Full story | | South Africa's finance minister said on Tuesday that reports of his imminent arrest were "extremely distressing", calling them an attack on. . . Full story |
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Company News | Implats announced to shareholders that after six years on the Implats board of directors (the ôboardö), of which the initial two. . . Full story | | Shareholders are advised that Wescoal is in the process of finalising its results for the 12 month period ended 31 March. . . Full story | | As the major shareholder of Mapochs Mine (Pty) Ltd. ("Mapochs Mine"), Evraz hereby advises all shareholders and interested parties that on. . . Full story | | Shareholders are advised that Exchange Sponsors (2008) (Pty) Ltd. (æExchange SponsorsÆ) has been appointed as Sponsor to Miranda, effective from 18. . . Full story |
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| Shareholders are advised of the acquisition of Safari Lodge (ôthe propertyö) as a going concern by Orion Real Estate (ôthe Purchaserö) from Gmeiner Investment Holding (Pty) Ltd. (ôthe Sellerö) for a consideration of R100 000 000. The effective date of the transaction will be the date of transfer of the property into the name of the Purchaser. The Seller is a related party to Orion Real Estate.
Terms of the Acquisition
The total consideration for the acquisition of the property is R1. . . Full story |
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Company Results | Revenue for the interim period decreased to R2.067 billion (2015: R2.167 billion). Results from operating activities lowered to R1.050 billion (2015:. . . Full story | | Revenue for the period increased to R491.7 million (2015: R376.1 million). Gross profit widened to R144.3 million (2015: R67.9 million). Operating. . . Full story | | Revenue for the interim period increased by 16.8% to R42.484 billion (2015: R36.383 billion). Gross profit rose to R3.659 billion (2015:. . . Full story | | Total revenue for the interim period grew to R772.1 million (2015: R592.6 million). Net operating profit increased to R486.1 million (2015:. . . Full story |
World Markets (Spot Prices)
Name | Time | RP | Move | % Move | JSE Overall | 17:00 | 52797.23 | 268.39 | 0.51% | JSE Top 40 | 17:00 | 46636.41 | 243.03 | 0.52% | JSE Gold | 17:00 | 2206.11 | -19.05 | -0.86% | JSE Financial | 17:00 | 40497.79 | 515.94 | 1.29% | JSE Industrial | 17:00 | 78925.07 | 455.96 | 0.58% | JSE Indust 25 | 17:00 | 71319.06 | 423.67 | 0.60% | JSE Resource | 17:00 | 31937.98 | -223.43 | -0.69% | DJ Futures | 19:52 | 17597.00 | 108.00 | 0.62% | DJ Ind | 19:58 | 17623.15 | 93.17 | 0.53% | SP 500 | 19:58 | 2059.33 | 12.12 | 0.59% | Nasdaq | 19:58 | 4759.40 | 43.67 | 0.93% | FTSE 100 | 17:03 | 6150.90 | -16.87 | -0.27% | DAX | 18:08 | 9943.23 | 53.04 | 0.54% | CAC40 | 18:08 | 4319.30 | 21.73 | 0.51% | Nikkei | 08:28 | 16644.69 | -8.11 | -0.05% | Shanghai | 09:28 | 2807.51 | -36.17 | -1.27% | Hang-Seng | 10:28 | 19826.41 | -292.39 | -1.45% | All Ords | 08:40 | 5420.50 | -38.00 | -0.70% | NZSE 50 | 09:02 | 6982.63 | 7.76 | 0.11% |
| | Name | Time | RP | Move | % Move | Gold $ | 19:59 | 1272.80 | -5.22 | -0.41% | Gold R | 19:59 | 20078.15 | 133.42 | 0.67% | Gold R/kg | 19:58 | 652489 | 4285 | 0.66% | Silver $ | 19:59 | 17.1270 | -0.0710 | -0.41% | Platinum $ | 19:58 | 1038.50 | -7.92 | -0.76% | Palladium $ | 19:59 | 578.10 | -4.40 | -0.76% | R186 | 15:31 | 9.47 | 0.05 | 0.53% | R204 | 15:31 | 8.50 | 0.04 | 0.47% | R207 | 15:31 | 8.84 | 0.06 | 0.68% | Brent Crude | 19:58 | 49.47 | 0.50 | 1.02% | USD / ZAR | 19:59 | 15.7416 | 0.1413 | 0.91% | GBP / ZAR | 19:55 | 23.0445 | 0.5077 | 2.25% | EUR/ ZAR | 19:55 | 17.8055 | 0.1520 | 0.86% | NZD/ ZAR | 19:59 | 10.7200 | 0.0947 | 0.89% | AUD / ZAR | 19:55 | 11.5094 | 0.0781 | 0.68% | USD / JPY | 19:59 | 109.5800 | 0.4390 | 0.40% | EUR / USD | 19:59 | 1.1287 | -0.0026 | -0.23% | GBP / USD | 19:59 | 1.4630 | 0.0171 | 1.18% |
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The JSE Today
Trading Statistics
Date | Adv. | Decl. | Unch. | Actives | Volume | Value | Trades | Orders |
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18/05/2016 | 191 | 155 | 52 | 398 | 293,922,827 | R28,492,461,670 | 287814 | 1136653 | 17/05/2016 | 166 | 192 | 53 | 411 | 277,715,648 | R23,661,137,326 | 327852 | 2752565 | 16/05/2016 | 205 | 168 | 51 | 424 | 248,690,610 | R20,326,877,811 | 241175 | 2031810 | 13/05/2016 | 143 | 202 | 74 | 419 | 264,643,158 | R22,137,439,840 | 301958 | 2518190 | 12/05/2016 | 108 | 205 | 71 | 384 | 230,395,243 | R17,322,468,289 | 224379 | 2382084 |
* Includes all listed instruments on the JSE
Index Summary Index Name | RP | Move | % Move | Top 40 | 46,636.41 | 243.03 | 0.52% | Industrial | 78,925.07 | 455.96 | 0.58% | Mid Cap | 74,206.22 | 352.19 | 0.48% | Small Cap | 60,272.74 | 174.00 | 0.29% | Resource 20 | 31,937.98 | -223.43 | -0.69% | Industrial 25 | 71,319.06 | 423.67 | 0.60% | Financial 15 | 14,676.05 | 221.17 | 1.53% | Financial & Ind. 30 | 73,606.22 | 625.52 | 0.86% | All Share | 52,797.23 | 268.39 | 0.51% | Oil & Gas | 7,195.69 | .00 | 0.00% | Mining | 22,713.66 | -280.15 | -1.22% | Gold Mining | 2,206.11 | -19.05 | -0.86% | Platinum Mining | 26.98 | .26 | 0.97% | GENERAL MINING | 5,660.40 | -95.97 | -1.67% | Oil & Gas Producers | 38,689.88 | .00 | 0.00% | Basic Materials | 22,638.66 | -128.91 | -0.57% | Chemicals | 23,252.20 | 239.27 | 1.04% | Forestry & Paper | 52,839.69 | 143.79 | 0.27% | Industrial Metals | 6,987.52 | 69.80 | 1.01% | Industrials | 41,503.89 | 694.43 | 1.70% | General Industrials | 154.48 | 3.36 | 2.22% | Consumer Goods | 81,959.01 | 1435.17 | 1.78% | Automobiles & Parts | 5,047.48 | 110.96 | 2.25% | Household Goods | 595.96 | 5 | 0.80% | Health Care | 9,149.77 | 8.04 | 0.09% | Beverages | 327.94 | 8.03 | 2.51% |
| | Index Name | RP | Move | % Move | Food Producers | 8,992.36 | 20.91 | 0.23% | Personal Goods | 982.28 | 13.48 | 1.39% | Consumer Services | 17,253.26 | -249.64 | -1.43% | General Retailers | 7,458.38 | -52.09 | -0.69% | Travel & Leisure | 5,498.38 | 52.28 | 0.96% | Media | 444.08 | -8.32 | -1.84% | Support Services | 2,091.26 | 115.63 | 5.85% | Telecommunications | 7,108.60 | 14.58 | 0.21% | Financials | 40,497.79 | 515.94 | 1.29% | Banks | 6,020.34 | 69.00 | 1.16% | Non-life Insurance | 57,424.97 | 765.67 | 1.35% | Life Insurance | 37,816.33 | 688.17 | 1.85% | General Financial | 4,556.93 | 82.63 | 1.85% | Technology | 48,299.74 | -21.71 | -0.04% | SHARIAH TOP40 | 3,076.72 | -7 | -0.21% | FTSE/JSE SHARIAH ALL | 3,390.92 | -3 | -0.10% | COAL MINING | 8,606.51 | 10 | 0.12% | FTSE JSE Fledgling | 7,108.12 | -8 | -0.11% | FTSE/JSE Alt X | 1,493.25 | -10 | -0.65% | SA LISTED PROPERTY | 637.82 | 4.39 | 0.69% | CAPPED PROPERTY | 565.49 | | 0.84% | RESOURCE | 18,063.35 | -103 | -0.57% | DIVIDEND PLUS | 199.62 | 1 | 0.60% | FTSE/JSE RAFI 40 | 9,437.61 | 33 | 0.35% | Capped Top 40 | 24,793.16 | 129 | 0.52% | Capped All Share | 26,895.71 | 133 | 0.50% | JSE TABACO | 12,199.39 | 188 | 1.56% |
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Click here for the Sharenet Index Summary page
Latest Consensus Changes** Code | Company Name | Status | Updated | VOD | VODACOM GROUP LIMITED | HOLD | 17/05/2016 | OCE | OCEANA GROUP LIMITED | HOLD | 17/05/2016 | S32 | SOUTH32 LIMITED | HOLD | 16/05/2016 | ARI | AFRICAN RAINBOW MINERALS | HOLD | 16/05/2016 | SPP | THE SPAR GROUP LTD | BUY | 16/05/2016 |
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Results Expected** Expected | Company Name | Fin. Date | 19/05/2016 | AFRIMAT | February 2016 (Final) | 19/05/2016 | CAR | February 2016 (Final) | 19/05/2016 | E MEDIA | March 2016 (Final) | 19/05/2016 | E MEDIA-N | March 2016 (Final) | 19/05/2016 | IAPF | March 2016 (Final) |
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Recent Dividends** Share Name | Dec-Date | LDT | Pay-Date | Amount | CORONAT | 17/05/16 | 03/06/16 | 13/06/16 | ZAR 2.2900 | DELPROP | 16/05/16 | 03/06/16 | 13/06/16 | ZAR 0.4791 | VODACOM | 16/05/16 | 17/06/16 | 27/06/16 | ZAR 4.0000 | ASTRAL | 16/05/16 | 03/06/16 | 13/06/16 | ZAR 3.9000 | MAZOR | 16/05/16 | 09/06/16 | 20/06/16 | ZAR 0.0850 |
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Ex Div** Share Name | Dec-Date | LDT | Pay-Date | Amount | PHUMELELA | 15/04/16 | 13/05/16 | 23/05/16 | ZAR 0.3400 | KAYDAV | 29/03/16 | 13/05/16 | 23/05/16 | ZAR 0.0550 | BLACKSTAR | 23/03/16 | 13/05/16 | 13/06/16 | ZAR 0.0374 | FINBOND | 20/04/16 | 13/05/16 | 23/05/16 | ZAR 0.0340 | RIPLC | 26/04/16 | 18/05/16 | 06/06/16 | GBP 0.0163 |
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Upcoming AGMs** Code | Company Name | Date | Status | GFI | Gold Fields Ltd. | 18/05/2016 | Confirmed | GFPP | Gold Fields Ltd. | 18/05/2016 | Confirmed | RNG | Randgold - Exploration Co Ltd. | 18/05/2016 | Confirmed | GBI | Gold Brands Investments Ltd. | 18/05/2016 | Unconfirmed | KDV | KayDav Group Ltd. | 19/05/2016 | Confirmed |
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