INDEXATION: IT’S NOT ONLY ABOUT FEES…
Casparus Treurnicht |Portfolio Manager |17th January 2019
The majority of fund managers consistently underperform the market. Some returns are so poor that it can take years for investors to recover. Investors will happily share successful bets that they’ve made, but they are reluctant to report those that resulted in a disastrous outcome. The equity market is the best performing asset class over the long term and investors that utilize indexation-based equity funds tend to perform better than their peers only making use of active funds. Investors have much to benefit by allocating a meaningful portion of their equity exposure to an indexation-based strategy.
The graph below illustrates how the market (black line) persistently outperforms the average general equity fund (blue line):
Investors in an indexation-based strategy will tell you that one of the primary benefits is lower fees which ensures that returns are as closely aligned to the index as possible. This is because active funds generally charge higher fees than index trackers and this is the main reason for their underperformance. However, there is another aspect that needs to be considered. What is the point of paying a lower fee for an index tracker that fails to track the index? In an ideal world you would want a tracker fund to exactly match the performance of the index that it attempts to mimic – however, in reality, some funds post a much larger differential than can be explained by the total investment charges related to managing the fund. In the graph below, we have taken all the indexation-based unit trusts (General Equity sector) and compared their performance to the respective indexes that they track, over various periods. A position on the grey line would indicate that the fund’s performance exactly matched the index, while a position above or below the grey line is an indication that the fund is not effectively delivering the index. Gryphon’s sampling approach can result in deviations over the short term; these smooth out over the longer term.
With twenty years of experience in index tracking, we are passionately committed to creating awareness and appreciation for the benefit of investors. When it comes to selecting a passive equity fund, we advocate selecting one that has successfully tracked the index for an extended period of time.