The value of active investing

The biggest benefit is the ability to mitigate risk – Sasfin Wealth.
Clinton Sprong, head of private clients at Sasfin Wealth. Picture: Supplied

As active managers across the globe struggle to outperform the index consistently, there have been growing questions about the value of active investing.

While debate is healthy, the discussion about active and passive investing has often degenerated into arguments about the “better” approach. Yet, both elements can be successfully combined to build diversified portfolios to suit a client’s individual needs.

Clinton Sprong, head of private clients at Sasfin Wealth, says there is no question that the two can complement each other.

“The benefit of the active component is that you are actively making decisions about what passive investments you want to invest in. It is part of the construction of the portfolio to meet your client’s needs and that is very much an active decision.”

The South African context

Sprong says due to the structure of the Johannesburg Stock Exchange – where Naspers, Richemont and BHP Billiton account for about 40% of the FTSE/JSE Top 40 index – there is still significant value in active investing.

With Naspers accounting for roughly 24% of the Top 40, a passive or exchange-traded fund (ETF) that tracks this index would invest almost a quarter of a client’s money in a single company.

“The biggest benefit from a South African point of view is your ability as an active fund manager to manage the risk component of a client’s investment by not having to put 24% of somebody’s money into one share. You can actively take a decision to have less money allocated to one share.”

Another benefit is the active manager’s ability to allocate a certain amount of money to different asset classes based on an individual’s investment goals, Sprong says.

“There hasn’t been a proven passive way of doing it.”

In the private wealth arena in particular, some clients are averse to investments in tobacco and alcohol shares (in some cases for moral or religious reasons), even despite the performance of companies like British American Tobacco and Anheuser Busch-InBev (SABMiller) over time. In such cases, constructing a bespoke portfolio around the client’s individual needs allows the manager to strip out certain investments.

Company directors, who may have a lot of share options in the companies they work for, may also prefer not to have additional exposure to their employer company or the sector in which it operates. An active decision would allow the manager to construct a portfolio that can reduce the risk for a particular client by not exposing them to that specific company or sector, Sprong adds.

It may be quite difficult to construct a portfolio for a client with very specific requirements by simply using a passive fund.

“If you’ve got a client that has got quite a high income requirement – maybe because they have retired and they need to live off an income – you can actively construct the share portfolio with great companies that offer a specific dividend yield that’s higher than what you would get from the market.” 

But this doesn’t mean that it should be an either/or decision.

Sprong says to bring the overall cost of the portfolio down, it can make sense to complement the portfolio with an ETF. This is also true for relatively high-risk industries such as venture capital and biotechnology, which comprise hundreds of companies, and where it can be difficult to isolate a single investment.

“In those cases, it often might make sense to rather buy a passive fund so that you benefit from the industry but without taking the risk of actually trying to choose which is going to be the best company in that industry.”

Particularly in the private client world, a significant part of the value proposition of active management is the client relationship, he says.

“I really do think that people still want to be able to talk to a person at the end of the phone – especially when it comes to money.”

This is especially true as individuals approach retirement and need to make decisions about their life savings.

The manager’s ability to engage clients about stock selection and how a particular investment strategy will allow them the best possible opportunity to reach their investment goals can also provide comfort during times of volatility when they may want to change course.

Brought to you by Sasfin Wealth.

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An article that accurately captures the purpose of active investing, namely that if a client needs access to dividends and to improve diversification you need to do more than just buy the top40 index tracker, because the top40 has a concentration risk in it.

This must be the 3rd article I’ve read promoting both active and passive investing as a combined strategy. And this is a paid article from an active management company. Is this the new strategy from the investment companies in hope they can deemed useful in the future? Once most ppl realize that the extra 2% in fees eats about 50% of your real growth, you’ll have to be more creative in luring customers…..

If that is the best they can come up with, this ship is going down. Even the king of investment, Buffet, is a passive investment advocate.

Sprong says: “The biggest benefit from a South African point of view is your ability as an active fund manager to manage the risk component…”

If that is true, put your money where your mouth is. Let’s start sharing in downside like we share in the upside. But for some reason, performance fees and management fees never want to compensate when that risk was not managed as well as theoretically postulated.

So what about 20% performance and 2% management fee when you outperform the benchmark
And
-20% performance and 1% management fee when you do not.
When this is in place, I will believe this view

Active can work

IF you could find a fun damager that actually knows enough about real business to make clever selections rather than bets.

99% of them (go look in the About Us section of the glossy website) have never actually started or run or fixed a real business.

They can run demon spreadsheets but ask three questions about cash flow and supply chain and estimates and they mist up

Right. Lots of soft stuff, which really is cherries on a cake, but cherries is only nice with a cake.

Investment boils down to risk vs return. Although nobody can predict the future and past performance does not promise future returns, if somebody keeps falling short, one need to ask questions.

Take a period of 10-15 years and compare return on investment for passive vs active. Active just keep falling short, and for period over 10-15 years with some bull and bear moments in between the risk for both approaches can be deemed similiar.

Therefor, same risk profile, but better returns with the one then the other. Is it nice having someone on the other side of the phone? Just take the additional money made and pay hourly rate to speak to whomever. It will be much cheaper and interesting

End of comments.

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