Episode 003 - Passive Investing

This blog entry is short and has been inspired by a very profound Warren Buffett quote; "If you don't find a way to make money while you sleep, you will work until you die." I'll let you pause for a second and think about that one.

The first thing that popped up in my head after seeing that was "Passive Investing". I want to explain this concept so that I can save you a lot of money on your investments in terms of fees. So, here goes.

Passive investing is an investment style where the fund manager replicates and tracks a particular index/benchmark that represents the overall performance of a certain sector, asset class or market. Before I go on any further let me explain that definition a little bit more. If an analyst is on TV says that the US Markets went up 2% or the South African markets had a bad day and were down 3% for the day, that means there is a way of measuring these ups and downs which is why the analysts are able to quantify the performance and come up with exact % daily changes. The measuring tool used is called an "Index". Watching or reading on RSA financial markets you'll always hear phrases like the "JSE All Share Index", the "Top 40 Index", performed in a certain way. So all in all, on a daily basis when the JSE markets close at 5pm, all the different indices are calculated and that's how the analysts come up with these numbers and start sounding all clever on TV. Got it now? Great!

Fund managers need to find ways to replicate the performance of these different indices so that they can offer such products to you as an investor. A particular Asset Management company for example Sygnia/Coronation/Allan Gray/Investec etc, hires a Portfolio Manager who will be mandated to duplicate the performance of different indices, by trading and holding the same shares in that index, at exact proportions. So this means if a particular index is up 3% at the end of the day, the funds managed by the portfolio manager also need to do exactly that, 3% up. No excuses!

In case you have always been curious, that's actually my day to day job, and more. Now you know.

The strategy by definition alone represents a huge pool of different types of passive investment strategies; from tracking the US Equity stock Market’s performance, to tracking the performance of the Top 40 stocks in the JSE or tracking the Chinese Real Estate market performance. There's thousands of different indices to track, but for this blog I think I'll keep it local.

As an investor you're able to buy into such products in two ways; either through a tracker/index fund that can be accessed via Unit Trusts or through a listed Exchange Traded Fund (ETF).

Hear are some of the different indices that you as an investor can put your money in - once you decide that you want to.

JSE All Share Index: This is most probably the biggest in terms of the number of shares held. It has around 165 shares that are listed in the JSE in it. The index is used to measure the overall RSA equity market performance.

• JSE Top 40 Index: This is the biggest 40 companies listed in the JSE, with Naspers leading the pack at 21% of the index.

• Other indexes have a certain theme that they follow:

  • JSE Listed SA Property Index: This tracks the performance of JSE listed Property stocks

  • JSE Divi Index: This tracks JSE listed shares with the biggest 12 months dividend forecast. The biggest holding on this is Patrice Motsepe's African Rainbow Mineral

• ... the list goes on.

You have an opportunity to actually buy into UTs that track the performance of the mentioned indices and more, at a very low fee (around 0.30% to 0.80% of your funds, annually). On the previous blog we spoke about TFSAs (you better not be saying "what?") which allows you to hold such investments products.

Essentially you're broadly investing in a particular sector or market without worrying too much about individual stock risk, i.e you're diversifying your portfolio. You're also saving on fees and most importantly you're doing what Warren B was talking about!

Signing Out!