Active and passive strategies play highly complementary roles in a well-constructed investment portfolio that aims to deliver strong returns over the long run.

In a recent webinar, CoreShares MD Gareth Stobie discussed the benefits of blended portfolios with Victoria Reuvers, Director and Senior Portfolio Manager at Morningstar Investment Management South Africa.

Reuvers said that the long-running ‘active versus passive’ debate is immaterial, since these strategies work alongside each other to produce optimal returns net of costs.

Passive investment products, including index-tracking ETFs, deliver market-related returns and significantly reduce costs. They also provide diversification and offer more predictable outcomes, with a lower risk of underperformance relative to the market. Another benefit is that they encourage investors to remain invested through cycles – a habit that promotes long-term outperformance.

On the other hand, active investment managers aim to deliver excess returns. While most active managers struggle to beat the market after taking fees into account, some do generate strong returns, meaning the selection process is crucial.

Instead of taking an ‘either or’ approach, investors should use active strategies where they makes sense in a portfolio, and passive strategies where this approach is suited.

As an example, the CoreShares Top 50 ETF can be used in a portfolio to provide low-cost exposure to South African equities, while the CoreShares MSCI ACWI Fund of Funds can provide diversified global equity exposure.

By blending active and passive strategies in this way, an investor can achieve excellent returns. The passive segment keeps costs in check and tracks the market, while the active component generates alpha.

Morningstar’s preferred South African passive equity fund is the CoreShares Top 50 ETF. Reuvers explains that this is because the fund caps the weighting of stocks such as Naspers at 10%, thereby reducing concentration risk, and provides more diversification than the JSE Top 40 index as it includes 10 extra counters. By adding in these extra constituents, it also provides exposure to the JSE’s mid-cap segment.

Passive strategies are tough to beat

Morningstar’s analysis shows that only a small percentage actively managed equity funds in the ASISA category (the Association for Savings and Investment South Africa) outperformed the JSE All Share Index (ALSI) in 2020.

The average South African equity fund provided returns of 2%, while the ALSI advanced 7%, despite the fact that just 29% of its constituents rose. This means the selection of active fund managers is a difficult but important task.

In a similar vein, Reuvers stressed that passive strategies are not created equally, and therefore the selection process is just as important. The ALSI, for example, is heavily weighted towards a handful of large stocks, meaning concentration risk can be an issue.

While global pension fund flows into passive strategies have dwarfed flows into active funds in recent years, South Africa is slightly behind the curve and there is therefore an ongoing need to educate financial advisors and other key stakeholders in the market, Stobie said.

Meanwhile, Stobie said on the webinar that CoreShares plans to play a more active role in investment stewardship in the years ahead, as the likes of BlackRock and Vanguard have done in developed markets. This will entail a greater emphasis on management engagements and proxy voting, with the intention of promoting positive environmental, social and governance (ESG) outcomes.

We invite you to watch this on-demand webinar to explore these concepts further:

Featuring Overview

Speaker

guest

Victoria Reuvers

Morningstar Investment Management
Victoria Reuvers is the managing director for the Morningstar South African investment management group. She is responsible for leading the business and leveraging Morningstar’s global investment capabilities to provide best-practice investment management for clients. Her career at Morningstar began with the formation of the South African Investment Management business in February 2015 where she was a senior portfolio manager. She was responsible for leading the South African investment team and building portfolios to deliver better investment outcomes to Morningstar clients. Before joining Morningstar, Victoria was the founder and CEO of Trivium Capital (Pty) Ltd, an investment consulting and research firm in Cape Town. As well as driving strategy for the business, Victoria was a senior portfolio manager at Trivium Capital. Her role included investment research, portfolio construction and ongoing portfolio management. Before founding Trivium, Victoria gained extensive experience in fund analysis and quantitative research experience at Investec Asset Management where she worked in the retail fund management team. Prior to that, she worked for Investec Private Bank as part of their growth and acquisition finance team. Victoria began her career at Standard Corporate and Merchant Bank and has 20 years’ experience in the financial services industry. She holds a bachelor’s degree in finance from the University of Cape Town.

Host

Gareth Stobie

CoreShares Asset Management
Gareth is the managing director of CoreShares - a leading South African passive investment management business, and has led the business from inception. CoreShares manages a number of index funds and ETFs, and is the appointed manager of the BCI, Efficient Select range – a contemporary range of low-cost balance funds utilising index strategies. CoreShares follows an Evidence-Based Investment (EBI) philosophy. Gareth has an MBA from Wits Business School and has over 18 years' financial services experience across structured finance, investment management and banking.

How and why do professional fund buyers blend passive strategies into portfolio construction?

Learning outcomes:

  • Unpack the benefits that passive investing brings to a portfolio
  • Work through examples of portfolios that blend passive and active allocations together
  • Explain how due diligence on a passive provider differs from that for active managers

Your Passport to Passive is a series of exclusive webinars which take an in-depth look at the pros and cons of passive investing. We unpack what it really means and debunk old myths using real world examples, so you can properly understand all the benefits of this investment strategy. It’s a must for IFAs, fund buyers and portfolio managers alike.

Read more about and access the recordings of the other three webinars in the series: