The whole: greater than the sum of the parts

The whole: greater than the sum of the parts

The following is a piece I did for Finweek in response to a question from a reader….

Investment for a 26 year old.

Broadly speaking, there are 2 things that impact the return of an investment over time. They are:

  • Asset allocation, and
  • Fees

If you can consistently get these 2 factors in your favour you will certainly reap success.

So where to invest R1million as a 26 year old investor looking for long term growth?

My advice would be to use 2 tracker funds; one local and one offshore. The reason for this being that the significantly lower fees that you will pay over the term and the consistently average return that you will earn will ensure that you end up at the top of the pile. Let’s examine the issue of returns first.

While there is no doubt that there are some very good fund managers in this country (and abroad) the issue is that there are no fund managers that consistently perform over long periods of time (there is plenty of research to show this). The result is that last year’s winners are often this year’s losers. In fact, there was a cute bit of research done some years back that suggested that as an investment strategy, you would be far better off switching into last year’s bottom funds than switching into last year’s winners.

So while there may be some good managers, there are no consistently good managers! And herein lies (one of) the arguments for index funds. By buying the index you are ensured that you will consistently get the return of the market. In South Africa, most of the index funds track the ALSI 40 or some variation of this. I have, however, found one fund that tracks the “whole” market, or at least tracks the top 100 shares which effectively means that you end up tracking around 95% of the market (the rest of the shares are too small to be tradable for the funds to track).

The second issue when it comes to investing is costs: they are far more significant than most people realise and we often glibly state that either we don’t know the costs of the investments we are using or that we are “only” paying x% per annum. When it comes to investing, each layer adds more fees. So while it might be convenient to invest via a LISP, it is more expensive.

And it is even more expensive to invest into a fund of funds (or wrap fund) via a LISP. The graph below shows the effect of a reduction of fees by 0.5%, 1% and 2% over 20, 25 and 30 year periods. Over 30 years, even a 0.5% reduction in fees will result in 27% more in value and 2% means 47% more money at the end!


My advice then would be to get out of the LISP’s and invest the proceeds and the new money into the following funds:

For my SA portion (50%) I would invest into the Gryphon All Share Tracker Fund (I have heard that SIM are soon to be launching an equivalent fund). You will end up tracking the top 100 shares on the JSE and will be paying an annual fee of 0.34% (the TER is currently more than this as the fund is still very small and the TER should get closer to the annual fee as the fund grows). At 0.78% you are still paying considerably less than for an actively managed equity fund (some of the top performing funds’ TER’s are north of 2.5% pa so it is a simple thing to achieve a fee saving of close to 2% pa).

On the offshore side of things, it is sadly not quite as simple to invest in tracker funds. While there are literally tens of thousands of funds in which to invest, South African investors have been limited to those that have been “approved” by the Financial Services Board. This is not a completely bad thing, but the because of this, this space has been dominated by the active managers. Only fairly recently have some tracker options been made available. Sadly, however, their fees are still a bit high (although they are significantly lower than the actively managed funds). So while American investors can you buy the S&P500 index for around 0.3% pa, SA investors are still going to pay around 1% for an offshore index fund (although I suspect that this will change quite soon and quite quickly).

In fact, as I looked at the offshore options available to SA investors, Deutsche Bank have recently announced that the fee on their MSCI World Index Fund has just been reduced to 0.6%pa (excl VAT).

My advice then is to buy the whole of the market at low fees and as a result you will reap success.