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The theoretical basis for indexation was documented by Sharpe (1991) who developed the theory, which he called The Arithmetic of Active Asset Management, which holds that before costs the average actively managed investment will equal the return of the passively managed investment, and that after costs, the return of the actively managed investment will be less than the return on the passively managed investment. Sharpe argues simply that some managers will outperform the market, while others will underperform - the average manager will match the market (before costs) and underperform the market after costs. Further studies by Surz & Stevens (1999) and Ibbotson & Kaplan (2000) confirmed and strengthened Sharpe´s thesis.

While this is not a popular view in South Africa currently, it has gained traction internationally and is supported by the increasing size of local asset managers. To quote Charles D. Ellis, in his book Investment Policy: "Investment management, as traditionally practiced, is based on a single basic belief: Professional investment managers can beat the market. That premise appears to be false, particularly for the very large institutions that manage most of the assets of most pension funds ... because these institutions have effectively become the market."

At Gryphon we believe that secular changes to our investment environment will increasingly drive the move to indexation. These secular changes include:

  • The move to a lower interest rate environment will increase the focus on costs associated with investment products
  • Increased market efficiency
  • More accurate assessment of performance. Do fund managers deserve to be paid for Beta performance which they generate? If so, are active management fees appropriate?


We find ourselves in the unique position of not having to defend margins on "traditional products". Many of our competitors will simply not offer indexation as a solution as they risk destroying their existing "high margin" business. We don´t believe in overpaying, and neither should you!



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