Everything you need to know about passive investing
04 September 2018
“Invest” is a word that you can’t escape when seeking financial advice, and there’s good reason for that. Investing is a way to grow your money while enjoying massive benefits in the long term. An exciting way to invest with Absa is through one of our seven Passive Funds – all of which include specialised offerings, depending on your objectives as an investor.
Passive funds versus active funds
This article demystifies passive and active funds and investments and strategies. We’ll unpack what each type of fund is, what makes the funds different from each other and what the pros and cons of each are. “Active fund management is where the manager takes a position that is different to the benchmark of the index,” says Tsitsi Hatendi-Matika, Head Retail Investment Specialist at Absa. “The idea here is to generate excess returns and make profit from market movements.” Passive funds, on the other hand, are when the manager doesn’t actively manage the funds. Instead, the fund’s portfolio mirrors the market index of stocks or bonds along with their returns. According to Hatendi-Matika the biggest difference between active and passive funds is that “Passive funds consistently track the return of the benchmark, whereas active funds are a lot more volatile.” There’s also the fact that passive funds are generally cheaper than active funds and come with lower trading costs – a draw factor for those looking to save on their investment management fees.
Pros and cons of active and passive funds
As with all things in life, there are pros and cons when it comes to both investment options. Hatendi-Matika asserts that one of the biggest pros of opting for passive funds is that it is a safer choice, making it a great option for first-time investors or those who are a bit unsure about the world of investments. Adding to this, investors don’t have to worry about day to day market movements or keeping track of what is going on. Passive funds also create an opportunity for diversification of your portfolio, unlike some active funds which can be more concentrated, particularly where the active manager has a high level of conviction in a select few holdings. There’s also no need to worry about the philosophy of the manager who manages your money, whereas with active funds, the investor really needs to understand the manger and how they work. Overall, passive funds offer a simpler, more transparent approach to investing than active funds do.
As far as the cons around passive funds go, Hatendi-Matika warns that in volatile markets passive funds tend to display lower returns, and according to a study done by S&P, inefficiencies in the bond markets can negatively impact passive funds in periods of high volatility. “Should something happen mid-month that results in losses, a manager is not allowed to act because that is not within their mandate. The lag in reaction time and waiting for the index to rebalance therefore creates some difficulties in limiting losses.” In contrast, active funds offer a host of pros in this regard, with a greater return potential thanks to the stock-picking ability and the manager’s freedom to find the gaps in the market where good returns are possible. Active funds also tend to thrive in volatile markets because not only can they trade in and out at a profit, but they can react much faster and limit losses. However, there is a greater risk when it comes to the variation of the benchmark index, along with a need to research your managers and how well they have performed in the past. In addition, active funds bring with them higher fees, higher trading costs and are often more complicated than passive funds.
Are passive funds for me?
If you’re wondering if passive funds could benefit you, Hatendi-Matika claims that passive funds are the perfect option for investors who are worried about having to pick a suitable active manager or who don’t have enough insight to know which managers are good. “Investors who are worried about timing the market will also benefit from passive funds because they can invest their money and essentially forget about it over their investment time-horizon.” Hatendi-Matika adds.
Now that you have a better understanding of passive funds, it’s time to choose from Absa’s exciting new arsenal of Passive Funds. These products focus on expanding our current offerings to add to a variety of unit trust funds to choose from, along with the chance for investors to access both investment types on the same easy to use platforms.
We are launching four new, exciting Single Manager Passive Funds as follows:
- Absa Bond Index Fund
- Absa Property Index Fund
- Absa Top 40 Index Fund
- Absa Dividend Plus Index Fund
The Multi-managed Funds address investors’ needs for a combination of different managers to capture varied expertise and want stable, risk-adjusted returns. The multi-managed passive solutions are suited to investors looking for protection from cyclical movements in markets.
The Multi-managed Passive Fund offerings include:
- Absa Multi Managed Passive Preserver Fund
- Absa Multi Managed Passive Accumulation Fund
- Absa Multi Managed Passive Growth Fund
A well-diversified portfolio with space for active and passive solutions will remove the pressure of trying to figure out when to make changes and, with subdued growth and inflation on the rise investing, is more important than ever.
Absa’s offering of Passive Funds allows you to build wealth gradually while enjoying access to index-tracked funds managed in a cost-effective manner. Furthermore, investing in these Funds is a seamless and user-friendly experience. If you are already an Absa client, all these Funds can be accessed through internet banking with just a few clicks away.
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Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.