The merits of active and passive investing – a different perspective Jannie Leach, PhD Nedgroup Investments

Active & Passive in context In context of current structural environment Demographic and labour trends Regulatory changes Active vs Passive is the “old debate” Today is about the merits of active AND passive investing

A different perspective provides answers Why do active funds still dominate in SA and globally? Why hasn’t passive been adopted before? Where will passive be adopted (on a large scale)?

Global trends in active and passive investing

Active funds still dominate Source: Morningstar, Financial Times, CFA Institute, Nedgroup Investments

Global flows in 2014: Region

Global flows in 2014: Category

Passive flows in South Africa 2014H1 2015

Evolution of the South African retirement industry Contextualising the trends

Evolution of the retirement industry DB SchemesDC SchemesRetail

Active management industry Focussed asset management firms Independent financial advisor (IFA) Evolution of the asset consultant DB SchemesDC Schemes

Passive management industry Industry has matured (AM and IFA) Shift back to Balanced mandates Focus on costs Opportunity for passive DC SchemesRetail

Growth of retail market Source: ABSA AUM Surveys, Total assets (excluding Life)

Evaluating the merits of active and passive In context

Alpha and the paradox of skill Limiting factor … Size Decrease in excess return Increase in absolute skill

‘Alpha’ has been shrinking Source: Morningstar, Nedgroup Investments Calculation benchmark: Average fund in category

Excess return of Top over Bottom quartile Source: Morningstar, Nedgroup Investments

Arithmetic of active management Average Active Passive

Governance

Benefits of passive investing

The adoption of passive funds in SA Passive Balanced funds Focus on multi-asset structuringExpected scale in this spaceStand alone retirement solution Changing environment “Retailisation” of InstitutionalShift back to balanced fundsFocus on costs

“Smart” Beta Most commonly known “RAFI” Effectively an alternative for active management – Rules-based indices – Active bets Knowledge = Information, interpretation and judgement – Smart Beta uses “flattened” knowledge – Applies a narrow interpretation to information

Conclusion Active and passive are inextricable linked Overall passive is good for the industry Active is here to stay

Final thought “Mankind, in following the present sense of their minds, in striving to remove inconveniences, or to gain apparent and contiguous advantages, arrive at ends which even their imagination could not anticipate, and pass on, like other animals, in the track of their nature, without perceiving its end... Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.” Adam Ferguson, An Essay on the History of Civil Society (1767).

Thank You