The merits of active and passive investing a different
perspective Jannie Leach, PhD Nedgroup Investments
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Active & Passive in context In context of current
structural environment Demographic and labour trends Regulatory
changes Active vs Passive is the old debate Today is about the
merits of active AND passive investing
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A different perspective provides answers Why do active funds
still dominate in SA and globally? Why hasnt passive been adopted
before? Where will passive be adopted (on a large scale)?
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Global trends in active and passive investing
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Active funds still dominate Source: Morningstar, Financial
Times, CFA Institute, Nedgroup Investments
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Global flows in 2014: Region
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Global flows in 2014: Category
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Passive flows in South Africa 2014H1 2015
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Evolution of the South African retirement industry
Contextualising the trends
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Evolution of the retirement industry DB SchemesDC
SchemesRetail
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Active management industry Focussed asset management firms
Independent financial advisor (IFA) Evolution of the asset
consultant DB SchemesDC Schemes
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Passive management industry Industry has matured (AM and IFA)
Shift back to Balanced mandates Focus on costs Opportunity for
passive DC SchemesRetail
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Growth of retail market Source: ABSA AUM Surveys, 2005-2014.
Total assets (excluding Life)
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Evaluating the merits of active and passive In context
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Alpha and the paradox of skill Limiting factor Size Decrease in
excess return Increase in absolute skill
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Alpha has been shrinking Source: Morningstar, Nedgroup
Investments Calculation benchmark: Average fund in category
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Excess return of Top over Bottom quartile Source: Morningstar,
Nedgroup Investments
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Arithmetic of active management Average Active Passive
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Governance
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Benefits of passive investing
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The adoption of passive funds in SA Passive Balanced funds
Focus on multi-asset structuringExpected scale in this spaceStand
alone retirement solution Changing environment Retailisation of
InstitutionalShift back to balanced fundsFocus on costs
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Smart Beta Most commonly known RAFI Effectively an alternative
for active management Rules-based indices Active bets Knowledge =
Information, interpretation and judgement Smart Beta uses flattened
knowledge Applies a narrow interpretation to information
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Conclusion Active and passive are inextricable linked Overall
passive is good for the industry Active is here to stay
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Final thought Mankind, in following the present sense of their
minds, in striving to remove inconveniences, or to gain apparent
and contiguous advantages, arrive at ends which even their
imagination could not anticipate, and pass on, like other animals,
in the track of their nature, without perceiving its end... Every
step and every movement of the multitude, even in what are termed
enlightened ages, are made with equal blindness to the future; and
nations stumble upon establishments, which are indeed the result of
human action, but not the execution of any human design. Adam
Ferguson, An Essay on the History of Civil Society (1767).