Vladimir Nedeljkovic. Picture: JEREMY GLYN
Vladimir Nedeljkovic. Picture: JEREMY GLYN

Passive asset managers need to do more than just track the index if they want to charge any fee, says Alexander Forbes’s chief investment strategist  Vladimir Nedeljkovic.

Globally, passive managers were charging much lower fees and some banks didn’t charge anything at all on index funds, he said.

In 2018, US fund manager Fidelity became the first to launch two zero-fee index funds. In SA index funds charges range from 20 basis points to around 100 basis points or 1%.

“Indexation, as far as I’m concerned, should charge exactly zero fees. They don’t do anything. If the asset management industry wants to charge more than that, they need to provide demonstrable value,” said Nedeljkovic, who was speaking at the Business Day-Financial Mail Investment Dialogue on Wednesday. He said the same goes for active asset managers.

He however acknowledged that some index funds are doing more than just tracking the JSE All-share Index (ALSI). He said there is a shift to tracking a host of other indices in order to outperform the average index bucket over time.

‘Passive no more’

“Passive is not passive anymore. These days it’s gone to factor investing and to try and look at market efficiencies in a more systemic way.”

Indexation is one form of passive investing whose aim is to replicate the performance of indices like the all-share index. It differs from passively managed funds that are not tracking an index as the latter holds select stocks. 

Index funds in SA are however not as popular as in the US where about 50% of assets are managed by index tracking managers. Gryphon chief investment officer Reuben Beelders said only about 18% of assets are allocated to index funds in SA.

Beelders argued that indexation delivers consistent performance and overcomes inherent biases that active asset managers may have. Gryphon surveyed 91 funds over a three-year period to February 2019 and found that 82% of those underperformed the market after fees. He said active managers struggle to produce consistent results, making it difficult for investors to choose outperforming funds.

In Gryphon’s survey 33% of the funds outperformed the index in 2016. However, only two of those were still outperforming by end of February 2019. “Rules-based investing in indexation is never going to shoot the lights out but it is going to give you consistent and predictable performance.”

Tiaan Fourie, head of manager selection and research at Ampersand Asset Management, said there is a space for both passive or indexation and active management. He argued that the actual returns investors receive usually have more to do with their own biases than whether they used an active or passive manager.