The battle between active and passive

Some considerations in the decade-old debate remain important.

- Johan Fourie

The Index Card is a popular personal finance book, first published in 2017. Its thesis is simple: Buy an index fund – like the ALSI Top 40 – rather than paying the fees of asset managers, who in the long run rarely outperform the market. I asked Nico Katzke, head of portfolio solutions at Satrix, why we should not all follow The Index Card’s advice and go for passive rather than active investing.

“The debate has often been framed, wrongly in my opinion, as either active or passive. In reality, both have their place. Active managers have an important price discovery role to play and preserve the ability to outperform indexes. Index-tracking funds, often referred to as passive funds, provide investors with a low-cost alternative, while tracking indices that have proven to be very hard to outperform consistently.”

But even passive investing is not that simple. “In reference to index funds, passive is a bit of a misnomer. Our research shows that the tracking error between two widely tracked indices, the Capped SWIX and the ALSI Top 40, is in line with that of the median active manager to the Capped SWIX. This suggests that your choice of index to track is a very active decision, and not all indices are created equally.”

The main advantage of indices, though, is the fee structure. The “tyranny of fees”, as the The Index Card makes clear, can be devastating for future returns. Is that true in the South African context too?