Index-linked investments are probably the most-overlooked investment opportunity available in South Africa. They simply are not included in the investment portfolios of most individuals.
Most of the big financial services companies, including the life assurers, do not make them available to you and financial advisers do not recommend them.
The reason is quite simple: These companies do not make as much money out of you if you invest in index-linked funds. They would prefer you to invest in such things as high-risk hedge funds simply so they can take more money out of your savings for their own back pockets.
Yet for many years, foreign research has been showing that index investing should make up an important part of your investment portfolio, particularly for your long term investments.
Now research conducted in South Africa is confirming this view. This year, Personal Finance has published reports on two important pieces of research: The first was undertaken by University of Stellenbosch MBA student Danie Wessels, and the second was by Roland Rousseau, a quantitative strategist at Deutsche Securities, South Africa.
Both came to much the same conclusion: Over the longer period, you are unlikely to find an active manager who will out-perform the market. And even if one or two do outperform the market, how are you going to spot them in advance?
And the nice thing about most (but be warned, not all) index investments is that they cost you less. This means that more of your money is invested in your name, which, combined with the effects of compounding interest over time, will add considerably to your nest egg.
Both pieces of research, which used different approaches, found that you should invest at least 30 percent of your money for the long term in index funds.
Index funds are mainly made available as collective investments, namely as unit-trust funds and what are called exchange traded funds (ETFs). The ETFs provided by the JSE, which trade under the name of Satrix, are the cheapest of all - especially if you invest directly without going through a financial adviser. In fact, Mike Brown, who heads Satrix claims that his research shows that his company offers what is probably the cheapest investment in the world, let alone South Africa.
A few years ago, when I first suggested that Personal Finance readers should consider index investing, there was an almost hysterical reaction from some vested-interest active managers who suggested that I did not know what I was talking about.
Instead of offering index investments, the broader financial services industry moved towards more and more complex investment vehicles which offered more choices with ever increasing product layers. So, instead of simple low-cost index funds, we have had a build up high-cost multi-manager investments offering a confusing and often unnecessary array of investment choices.
I am not knocking active management but, as the two local researchers found, you should use index investments as your core and then seek shorter-term out-performance from actively managed sector investments.
The interesting thing was that soon after I received the initial adverse reaction, Investec's general equity unit trust index fund (sadly now no longer in existence) topped the performance charts.
After that, even some hardened active asset managers began to admit that index funds should make up a part of your investment portfolio - but this admission did not encourage them to provide you with the funds to do so.
To enable you to find out more about index investing, we have joined forces with companies involved in providing ETFs in South Africa to explain what index investing is all about at seminars in Johannesburg and Cape Town in September. I suggest you sign up. The R250 it costs to attend a seminar could be a worthwhile investment.
Definitions
Index investment (or passive investment):
An investment which aims to match as closely as possible the performance of an index, such as the Alsi.
Index funds (also known as tracker funds):
These funds are intended to follow or replicate a selected index. The shares bought by the funds are modelled on a particular index.