The marketing schpiel tells us Exchange Traded Funds (ETFs) are an efficient means to enter the market and that ETF’s over a period of time will outperform the vast majority of peer group managed funds. What if, however you had completely ignored the unit trust and ETF universes and invested solely in investment holding company Remgro over the past decade? (And at the risk of sounding like a financial services ad: historical returns are no guarantee of future performance.)
Sure, your financial adviser would have had a heart attack and cursed you for a lack of diversification – but the evidence suggests you would have done rather well over five and ten years. So well in fact that it turns out that diversification would have been a bad thing.
An investment of R1000 invested in Satrix 40 vs Remgro over both five and ten year periods see the investment holding company significantly outperforming the ETF. Over a five year period resource heavy Satrix 40 would have grown to R1588 vs Remgro’s R2481. The outperformance is amplified over the past decade where the Top 40 index (as a proxy as ETF’s have not been around that long) would be worth R5573 and the Remgro holding R9802.
Rearview mirrors provide outstanding trivia benefits but give little valuable insight as to what the next decade holds for Remgro without British American Tobacco in the fold (remembering of course that despite its size the firm is also not included in the top forty) due to the absurdities of exchange control regulation.
Brett Landman, CEO of Satrix points out that despite its significant resource bias, Satrix 40 provides ordinary investors a level of diversification they might not otherwise afford, plus it reduces risk. Investors however have to choose whether they want market performance or outperformance and the greater that level of diversification; the less likely you are to get that.
“The outperformance of Remgro relative to the resource heavy Top 40 Index can largely be explained by the fact that industrials have strongly outperformed resources over the past five years,” says Landman. He argues a more appropriate comparison therefore would be vs the Satrix Indi – an ETF which tracks the performance of the FTSE/JSE Industrial index. It has delivered 17.34% per annum over the past five years, outperforming its unit trust peer group. Landman however concedes Remgro has done even better than that but he again points to the advantages of diversification limiting risk.
The big question therefore for private investors goes to who you believe is the better asset manager? Remgro without its stake in BAT remains largely SA focused with stakes in a broad universe of local listed and unlisted financial and industrial firms. It’s recently announced plan to acquire up to 22% of shipping and logistics group Grindrod broadens not only its global exposure but also gives it interesting Africa trade connection as well.
“The problem with index funds,” says Rudi van der Merwe at Standard Bank Stockbroking “is that it can take many years of underperformance for a company to be excluded from the index. Remgro has a number of interesting investments including FirstRand which they might choose to unbundle one day, plus investments now in shipping and fibre optics – that one is still small but will be substantially cash generative into the future.”
Stockmarket veteran of four decades David Shapiro would choose a handful Top 40 shares over the next ten years including BHP Billiton, Richemont, Aspen, Sasol and Bidvest, over either Satrix 40 or Remgro. Forced to choose between the either the ETF or the investment company – he would pick the latter.
In his recent newsletter to clients – Chief Investment Strategist at Brenthurst Wealth Management Magnus Heystek cautioned his clients against ETF’s which in bull markets are shown to be highly effective investment instruments. However in more volatile markets there is not enough investment flexibility.
US based Vanguard Investments founder John Bogle might fundamentally disagree. In his world, there was no grey area between active investment and index funds. His lower cost approach to investing earned him a strong following in the US. He is no longer associated with the firm and its 21st century managers are taking a different approach including actively managed portfolios into their mix. Explained Gus Sauter, Vanguards CIO in a letter titled: Active and index funds: No contradiction he explained the thinking behind the strategic switch: “I don’t think the markets are completely efficient. They are reasonably efficient, but there are mispricings. While I think there’s a very prudent argument for index investing, that argument doesn’t rule out well-executed active management at a reasonable price.”
In that lies the secret – the purchase of assets at a reasonable price.
Investors with experience, cash, lashings of wisdom and patience have a significant advantage over those who invest blindly by debit order on a monthly basis. While those who put money into ETF’s do so in the hope that markets will continually move steadily higher, those that put cash directly into equities or to managed funds have the opportunity to time or allow professionals to do it for them, their entry and exit from specific asset classes at particular times.
Independent research into how well Vanguard’s active managers did vs the index showed up some interesting facts: Just 8/20 beat the index by more than one quarter of one percent – enough to make up for the added cost of having a human manage the money – it suggested to the researchers that finding the perceived mispricings in the market are really difficult to find.
Says Landman: “The benefit of ETF’s is that you can hold Satrix 40 or Satrix Swix as the core of your equity portfolio and hold stocks like Remgro and other funds such as Satrix Divi as satellite holdings to enhance overall performance. A more sophisticated investor could also underweight or overweight industry sectors using the Satrix sector ETF’s based on an evaluation of market mispricing.”