The No.1 balanced fund in South Africa

About R800 billion is currently invested in balanced unit trusts in South Africa, and the average fee on these funds is about 1.5%. If 1.0% could be shaved off that number, local investors would earn an additional R8 billion a year – enough to buy all the shares of a listed company the size of Afrox and Oceana.

This shows just how important costs are when investing. The lower the fees you are charged, the more earned growth can be passed on to you as the investor, rather than being kept by the asset manager.

It’s also important to remember that this effect compounds over time. For each percentage point you pay in fees, you give up that return today, but you also give up all the growth you would have earned on that percentage point in the future. In 2013, the South African government published a discussion paper that showed that reducing fees from 2.5% to 0.5% would give an investor 60% more at retirement after saving for 40 years.

Given this reality, it should not be surprising that low-cost index-tracking unit trusts are delivering outstanding performance relative to similar actively managed funds in South Africa. The returns from the Sygnia Skeleton Balanced range of unit trusts over the last five years bear this out:

“When we launched the funds, we believed that low-cost passive funds would provide a meaningful challenge to the South African unit trust landscape, and the five-year results validate our thinking,” says Duane Gilbert, Head of Manager Research at Sygnia. “The funds have performed ahead of expectations, and the clear winners are South African savers.”

The Sygnia Skeleton Balanced funds offer the lowest management fees in the industry – just 0.4%. And if an investor accesses them through the Sygnia platform, there are no additional administration fees.

The funds can charge such low fees because they get exposure to the markets through index tracking, rather than employing teams of active managers to decide which shares or bonds to buy. While active management can outperform the market – as opposed to index-tracking, which aims to replicate the returns of the market – in reality, very few active managers can do so consistently.

Over the five years to the end of November 2019, only 15 out of the 107 general equity unit trusts in South Africa managed to out-perform the FTSE/JSE All Share Index. While there will always be active managers that outperform the index in any given period, the lesson of index management is that it is never the same managers year after year.  As an illustration: of the 15 managers that outperformed the index over the five years to the end of November 2019, only six of those had outperformed the index over the 5 year period to the end of May 2019, a mere six months prior.

“These results are not specific to South Africa,” says Gilbert. “The latest SPIVA scorecards from S&P Dow Jones Indices show that only 17.9% of US large-cap equity funds outperformed the S&P 500 over five years, and only 19.8% of European equity funds outperformed the S&P Europe 350 Index over five years.”

The problem for investors is not only that so few active managers are able to outperform the market, but that it is almost impossible to know ahead of time which managers those will be. Past performance is not a guarantee of future performance, and sometimes the best-performing manager in one period is the worst-performing in the next.

However, cost is a good driver of future returns. This is simple maths: the lower the fee, the more portfolio growth the investor keeps and the more likely they are to see a higher return.

This is why index-tracking funds offer the most reliable vehicle for investors to enjoy good performance. Whether in pure equity funds or though balanced products like the Sygnia Skeleton Balanced Fund range, the results speak for themselves.

Disclaimer
Sygnia Collective Investments RF (Pty) Ltd is incorporated and registered under the law of South Africa and is registered under the Collective Investment Schemes Control Act, 2002 (Act No 45 of 2002). The company does not provide any guarantee with respect to the capital or return of the portfolio. Nothing in this document will be considered to state or imply that the collective investment scheme or portfolio is suitable for a particular type of investor.