The Facts versus fiction

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.

This article provides the facts about actively-managed funds.

Let’s face reality. Everyone in the financial services industry is conflicted

This is our business and we all want to grow our business. Every advisor, investment company and product provider says the same thing: “we really care about you our client and we want to do what’s best for you”.

Sadly these are empty promises, as demonstrated by the industry’s dismal track record littered with poor practices, heavy fines and clients with far less money than they should have. In most cases, investors suffer and the industry prospers.

How do you overcome these conflicts?

You must distinguish facts from fiction (opinions). All experienced, intellectually honest investment professionals know the facts about active investing, even if their day jobs don’t support the facts. We learn this in the first year of the internationally-recognised CFA (chartered financial analyst) designation. These facts are remarkably simple. William Sharpe (Nobel Laurette), published this truth in The Financial Analyst Journal in 1991:

“If ‘active’ and ‘passive’ management styles are defined in sensible ways, it must be the case that

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.”