Edition: March - May 2015
EXPERT OPINION

Investors in active funds
score three own goals

Investors in active funds concede three own goals competing against a well-structured index fund:

  1. Earning lower returns before fees
  2. Paying higher fees, to further reduce their return
  3. Paying performance fees, despite underperforming

Scoring one own goal is disappointing, scoring three is devastating. These are the six essential points from our comparison that every trustee should consider.

1. Superior returns before fees since inception seven years ago in January 2008: 10X’s High Equity Fund (investors with a time horizon of more than 5 years) has consistently outperformed the large manager average by 1% pa before fees over 1, 3, 5 and 7 years.

10X’s seven-year track record covers the pre- and post-financial crises which is long enough to draw meaningful conclusions from our Index Fund strategy against active managers ie. this is not just a bull market analysis.

  10x-graph-1

2. Investor returns are boosted further by 10X’s materially lower fees: Investor returns are always reduced by total fees paid.

10X saves clients an estimated 1% in total fees for administration, advice, investment management, performance fees.

3. 1% extra equals 30% higher pension: 10X’s value-add from lower fees and higher returns is estimated at 2% pa, which translates to approximately 60% more money at retirement.

  10x-graph-2

4. Asymmetric payoff from active managers. The winning fund margin is very small but the losing fund margin is wide. One in eight (12%) funds outperformed 10X, with the top fund outperforming by just 0.4% pa after fees. But, seven in eight (88%) funds underperformed 10X after fees, with the bottom performing fund underperforming by 7.4% pa. (5 years to Dec 2014 – see table). On average, investors have lost 6.5% pa.

  10x-graph-3

5. Why do SA investors continue to play the losing investment game? Low cost index investing has become the mainstream investment choice for most institutional and individual investors in the US and other developed markets.

Why does SA not follow suit? Some possible reasons include:

  • Lack of knowledge and understanding of the long-term impact of losing 1% or 2% pa.
  • Apathy: “I will get round to it”, but don’t.
  • Failure to admit we may be wrong (confirmation bias).
  • Hope, blind faith or herd behaviour (everyone’s doing it).
  10x-graph-4

6. What should you do? You must be informed to make the best decisions for your retirement fund. Perform a fee-and-return benchmarking exercise to measure the value added or destroyed by your fund.

Hopefully your fund has added value and you can sleep well at night. However, if your service providers have destroyed value then you should investigate why. Your retirement should not be at risk due to high fees and poor performance.

  10x-graph-5

We manage several billion rand in private and corporate retirement investment funds. Our clients include Virgin Active, EOH, Deutsche Bank and Macquarie Bank.

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For more information on how 10X Investments can make the most of your employees’ retirement plans, please call 0861 109 109, email info@10X.co.za, or visit our website at www.10X.co.za

10X Investments is a licensed Financial Services Provider #28250 and S13B Pension Fund Administrator #24/444.