What does this mean for passive investments, which have grown significantly over the last few years as a result of the simple, low-cost structure and good long-term returns?
Steven Nathan, CEO of retirement fund administrator 10X Investments, does not believe that a much more difficult period lies ahead for local passive funds.
The reality is that investors cannot time the market.
Nathan says during the downturn of 2008 and 2009, the prevailing market mood was that equities were dead and low returns would be the new normal. Many investors took this to heart and shunned the equity market, but since then stock markets have experienced fantastic returns.
“You get cycles in stock markets – where things go well, things go badly – but you can’t predict the cycles.”
Keep in mind that in a lower-return environment, the impact of fees is even more significant, and passive investments should do better, he notes.
When the Alsi was at 38 000 points, many investment professionals also warned that the market would not go to 40 000.
“It is when you try and time markets and you try and do these sort of things that you destroy massive value. To time a market you have got to get two very hard decisions right – when do I get out and when do I get back in again?”
Nathan says, for almost any medium-to-long-term period, the return on a high equity portfolio beats a medium- and low-equity portfolio.
He says deciding on equity exposure in your investment portfolio is more important than determining whether the money should be managed actively or passively.
If one investor has a 75% exposure to equities and 25% to cash, while another has 30% invested in equities and 70% in cash – it wouldn’t matter which portfolio is managed actively or passively; the performance of the portfolios won’t be anywhere near each other, he says.
Nathan says the active-versus-passive debate is often blown out of proportion.
It is more important to determine the most appropriate fund for the investor’s time horizon. He says this is where most people make poor decisions because there are so many choices.
10X, which offers passive investment products to institutional and retail clients in the retirement space, will soon be launching a living annuity.
Nathan says deciding how to invest your retirement pot is a significant decision – the impact of fees is massive and a lot of people are investing their living annuities poorly.
In the long run there is also potential to launch passive unit trust products.
Earlier this year Old Mutual Private Equity took a stake in the R3 billion 10X business. The stake is “north of 20% but less than 50%”.