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 |
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Speaker![]() Victoria ReuversMorningstar Investment ManagementHost![]() Gareth StobieCoreShares Asset Management |
How and why do professional fund buyers blend passive strategies into portfolio construction?Learning outcomes:
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Password: PassporttoPassive#2 |
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: