Two articles that have been floating around since yesterday:

  1. Magnus Heystek’s “Why an index fund in South Africa is not always the best option“; and
  2. Steven Nathan’s rebuttal “Active management: Facts versus fiction

Here’s the damning argument:

Screen Shot 2016-07-21 at 12.08.36 AM

Check out that performance: the Satrix Top 40 index has been outperformed by some large actively-managed balanced funds, yo.

Magnus’ thoughts:

Index funds tend to do well in a bull-market, when returns are driven by the surge of money flowing into markets and everyone looks good and makes money. It tends to make earning good returns a very simple pastime, or so it would seem.

Years ago, before the great financial crash of 2008, I found myself in a radio debate with a Satrix spokesman, who tried to convince me and the audience that the Satrix 40 (unit trust that invests in the JSE’s top 40 companies) was the perfect investment for the average investor. ‘Buy the market and forget about it, the market will do the rest. You don’t even need an advisor to make such an investment, it’s so easy’ was the claim. I and other financial advisors, including Gavin Came who called in, found this comment particularly irresponsible.

My biggest concern was that the Satrix 40 was heavily influenced by the massive bull-market in resource stocks – then comprising almost 40% of the index. Resources, as we came to learn soon thereafter, is a notoriously volatile sector – one not to most retail investors’ liking.

That is: the South African stock market is over-exposed to certain types of industries (like Resources and Mining), so taking a bet on the Top 40 is actually taking a bet on Resources and Mining #fail.

So that’s one side of the story. On the other side, there is Steven Nathan, of 10x Investments, who doesn’t like this article at all:

Never ask a barber if you need a haircut – Warren Buffett

I was appalled after reading the lead article on Moneyweb today, ‘Why an index fund in South Africa is not always the best option’ by Magnus Heystek. The article displayed a complete lack of understanding of basic investment principles. Sadly, many unsuspecting readers may actually believe that what is written is correct.

Them is fighting words!

Basically, the basic investment principles we’re meant to be paying attention to are:

  1. Active investing is a zero-sum game: for every winner, there is a loser;
  2. The only real differentiator is costs;
  3. “Rather, it’s about probability. It is possible you (or your advisor) will pick the winning fund after all fees against an equivalent index fund, but the probability is low. Over the long run (ten years plus), the probability is well less than 20%. Properly measured it can be no other way.”

That is: Magnus Heystek cherry-picked some of those actively-managed funds, I guess?

Although I guess it is very annoying when the factual performance doesn’t align with the basic investment principles. Stupid real life.

If you were asking me though, I think that all of this is being overdone when it comes to ‘retail investors’ (being you and me, who occasionally dabble in some savings). And that’s mainly because: the example assumes that you’re investing a massive lumpsum, whereas most of us just invest a little each month.

So let’s do this:

  1. We’ll take the Allan Gray Balanced Fund and the Satrix Top 40.
  2. And we’ll assume that I’m investing R1,000 a month in each.
  3. I’m also going to make some broad assumptions about averaging out the annual returns evenly – but just take my word on that. It’s not that important – I’m more interested in the basic principle.

Here’s a comparison graph:

Screen Shot 2016-07-21 at 12.39.52 AM

So you should notice a few things:

  1. In the early stages of saving, despite the supposedly higher returns of the Allan Gray balanced fund, the two were neck and neck.
  2. For a significant period of the last five years, the Satrix 40 outperformed the Allan Gray balanced fund.
  3. It’s only in the last few months that this trend reversed, despite a poor commodities market.
  4. But either way, the REAL saving here was the R1,000 a month. Over the five years, there may have been between R14,000 (the Satrix) and R18,000 (Allan Gray) in return generated, but the bulk of the investment (the R60,000) came from the regular monthly saving habit.

If you were asking me, the active-passive debate is not really too vital for retail investors who are making small monthly savings. What’s more important is to save regularly.

And when you’re doing that, it’s important to keep in mind that any ‘5 year cumulative return’ numbers you might read always assume that you make your full investment upfront on Day 1 – not that you’ll keep adding in small increments each month.

Just a thought.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.