Contributed by: Kirk Swart
Regional Wealth Manager and Director of Overberg Asset Management
A hotly contested debate amongst investment professionals and retail investors is whether one should make use of an active portfolio manager to manage your investment portfolio, or rather go it alone by investing in passively managed Exchange Traded Funds (ETF`s). Active portfolio managers argue that by investing via an ETF, one can never outperform the market index and that their skills and research will provide consistent market outperformance. Proponents of ETF`s on the other hand argue that on average, active portfolio managers do not outperform the market index and paying the manager for the underperformance on top of it, is not worth it.
According to the latest Morningstar European Active/Passive Barometer, the early 2020 volatility that was caused by the coronavirus pandemic was the perfect opportunity for active fund managers to deliver alpha, turning around the last 10 years of underperforming their passive peers. Data from the report indicates that about half of all active European equity fund managers and one third of active European fixed income fund managers beat their passive peers in the first half of 2020. Actively managed equity funds typically hold more cash that their passive peers, which helped to soften the double-digit drawdowns that were seen in the first quarter of 2020. This partially explains why active equity fund managers outperformed active fixed income managers. Fixed income managers were also hurt by taking on more credit than their equity counterparts.
Taking a 10-year view to June 2020, the report indicates an active manager success rate of 25% in almost two thirds of the categories surveyed. The report further breaks down the active manager success rates into regions. For emerging market and European (ex-UK) active managers, less than a third survived and outperformed the average passive fund in the same category over 10 years. UK active managers performed slightly better with a 35% success rate. Success rates amongst large-cap US, Japanese, French, German and Swiss managers ranged between 5.6% and 28.3%.
All of Overberg Asset Management`s (Overberg) actively managed global portfolios outperformed their respective global benchmarks over 1-, 3-, 5- and 10-year periods. This remarkable and consistent outperformance can be attributed to the fact that asset allocation is the single biggest contributor to outperformance. ETF`s are single asset class investments in nature, and most mutual funds have fixed, rather than flexible mandates. To a certain extent, the argument between active and passive management is a moot point. Comparing an active equity fund with a passive equity index, or similarly, an active fixed income fund with a passive fixed income fund, doesn`t always makes sense. Outperformance occurs when a skilled manager can move between asset classes, countries, and currencies. A flexible mandate overcomes the limitation that a fixed mandate imposes. Overberg predominantly constructs its clients` global portfolios around Investment Companies (IC) that are listed on the London Stock Exchange. However, in certain instances, ETF`s can play a helpful part in achieving outperformance.
The growing number of ETF`s on offer in South Africa, thanks to innovative companies such as Sygnia, Ashburton and Satrix, have made it possible for South African rand-based investors to get the best from both passive and active management – the best of both worlds indeed. It has become increasingly possible to design an actively managed investment portfolio based on ETF`s that has exposure to offshore equities, bonds, commodities, preference shares, property and many more asset classes. These asset classes can be obtained across various countries such as, but not limited to, Japan, Europe, China, United States, Emerging Markets, and the United Kingdom. There are also a growing number of ETF`s that adhere to the environmental, social and governmental (ESG) metrics.
This is a very affordable alternative for investors looking to access an actively managed offshore portfolio without having to send funds directly abroad. ETF`s have a lower cost structure than traditional unit trusts. However, don`t let the low-cost nature of ETF`s lure you into buying any ETF without the advice of a skilled portfolio manager. ETF`s can be very concentrated when the biggest market capitalisation companies tend to dominate the index. Examples include the Satrix Top 40, which has a 20% exposure to Naspers and a 12% exposure to BHP Billiton, the Satrix Nasdaq 100 that has a 13% exposure to Apple and the Satrix MSCI China ETF that has a 14% and 13% exposure to Alibaba and Tencent, respectively. It is therefore critical that the underlying holdings of each of the ETF`s are studied and understood. A skilled portfolio manager will be able to move between ETF`s that offer different characteristics and asset classes, the same way as it normally would be done between IC`s.
The number of offshore ETF`s available on the Johannesburg Stock Exchange (JSE) keeps growing. This has allowed Overberg to design a portfolio based on the asset allocation of its global portfolios. Investors funds are not sent directly offshore as all holdings are purchased on the JSE whilst the underlying exposure is 100% offshore. This is a great way for investors to start building their offshore wealth with as little as R300 000 and without having to make use of any foreign exchange services. Having access to a low-cost rand hedge portfolio, based on the asset allocation principles of the OAM global portfolio, is a great way for smaller investors to start building their offshore wealth.
Contact any of the Overberg wealth managers for more information regarding our Onshore Global ETF portfolio.