Article by Helena Conradie

The SA market is slowly coming to recognise that passive and active investment styles are complementary rather than alternative offerings. Instead, each fulfil an important role for the investor and together offer more than they do individually.

Globally, investors have embraced the idea that combining both active and passive investment offerings gives a better outcome than going one route or the other. However, SA investors have been much slower in adopting this model, with some 95%-plus of all long-term fund assets invested in actively managed unit trusts and cash flows still heavily weighted in favour of actively managed funds.

So what is behind this slow take up? One possible reason is that most investors still have a narrow view of what passive investing has to offer; still believing it is limited to basic market cap-weighted All Share Index-type funds, when in fact there are a range of options now available.  There are also some key misconceptions about the relative strengths and weaknesses of passive and active investing in SA, which we believe may be hampering investors’ appetite for the core-satellite model.

However, we did an exercise in which we combined active and passive equity funds into a portfolio and compared the performance, risk and cost outcomes with each other – and we found the core-satellite portfolio, though slightly more volatile than an active-only portfolio, delivered better performance over all time periods reviewed and at a materially lower cost.

The two portfolios and the results achieved by them over time are reflected in the table below:

In the active-only balanced portfolio, the equity component is the average of the general equity unit trust category over one, two, three, four and five year periods. In the core-satellite portfolio, the equity exposure comprises a well-known active equity fund, the Equally Weighted Top 40 Index and the Dividend Plus Index, the latter two representing the passively managed core of the equity portion of the portfolio.

As the table shows, for all periods the portfolio that combines active and passive equity exposure outperforms the active-only fund, with the total expense ratio of the core-satellite portfolio 0.81% versus the active portfolio’s 1.33%. Volatility, as measured by the annualised standard deviation of the portfolios, is higher in the core-satellite portfolio than the active- only portfolio but the additional risk is not material and is more than offset by the higher performance delivered by the core-satellite portfolio.

Based on this analysis, it’s clear that there is a strong case for putting together core-satellite portfolios for investors, as opposed to relying solely on actively managed funds to deliver results. However, it’s also important to highlight that it’s not a one-size-fits-all solution and the structure of the portfolio needs to be tailored for the investor’s specific needs and circumstances.


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