Why active management is making a come-back

Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)
Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)

Humanity has always looked for some way to beat the system and has not been afraid to take the risks that are so often associated with it. 

Whether those risks are similar to playing the lotto, or taking on the vast oceans in search of new continents, it has just never been part of the human psyche to passively wait for things to happen. 

Taking an active approach has always been considered a key ingredient to being successful. 

Active management in the investment context refers to a strategy where investors make certain decisions with the aim of reaching a specific goal, such as outperforming certain indices, for example. 

Passive management, on the other hand, usually means that investors make very few changes to their portfolios, and in doing so, manage to keep investment costs relatively low. 

Active management was generally perceived to be the better strategy, but the more passive exchange-traded funds (ETFs) have proven quite the contrary over the last few years.

ETFs are highly tradable collective investment schemes listed on the stock exchange with the sole purpose of delivering 100% of the returns of a specific index, such as the FTSE/JSE All Share Index (JSE). 

Keep in mind that while active management focuses on the management of both shares and risk for investors, passive management focuses only on the share weights attached to a chosen index or benchmark, for example. 

This means that in a year such as 2017, where Naspers* carried 20% weight in the total JSE and top 40 related ETFs, and grew by a whopping 76% on top of that, it would have been extremely difficult for active managers to outperform the more passive funds, mostly because of a fear of taking too much risk and a reluctance to allocate the same weight in their funds to Naspers.

But, as the saying goes, “all good things come to an end”, and as things turned around for the JSE in 2018, we also started to see a change in this trend. Up to 7 October 2018, the JSE’s performance was still negative by 7% for the year and NO passive ETFs made the list of top 20 best performing funds for 2018. 

On the contrary, 44% of those best-performing funds are made up of actively management funds (General Equity Unit Trusts), which, on a year-to-date basis, is still ahead of the JSE in terms of performance. 

Of the 76 funds which make up this 44%, 17 were completely positive for the year – and this is quite an achievement as it’s no secret that for investors, this has been an incredibly challenging year so far. 

Furthermore, despite their higher-than-average costs, the actively managed funds which managed to outperform the JSE in 2018 so far, have managed to do so by an average of 4%.

I’m sure that there are quite a few passively managed fund supporters out there who may consider my data biased, but I assure you that this is not the case. 

I feel that there will always be space for good passively managed funds in most investment portfolios. 

What I want to reiterate, is the fact that while ETFs’ main purpose is to offer lower costs and a low tracking error, active managers’ main purpose is to manage both investors’ growth as well as risk. 

My mom always said that if you buy something cheap, it may end up costing you an arm and a leg. 

So when doing your homework on investments, make sure that you don’t only consider the price of those investments, but that you also take a look at their risk-adjusted historical returns.

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Yes. We need the money.
11% - 943 votes
It depends on how the funds are used.
74% - 6291 votes
No. We should have gotten the loan elsewhere.
15% - 1294 votes