Active investing versus index investing : an evaluation of investment strategies

Wessels, Daniel Rossouw (2004-12)

Thesis (MBA)--Stellenbosch University, 2004.

Thesis

ENGLISH ABSTRACT: The two investment strategies, active and passive (index) investing, were evaluated by comparing the average performance of actively managed funds in the general equity category of the South African unit trust sector with its benchmark, the ALSI index. Various comparative methodologies were followed in the analysis and covered the period 1988-2003. When the upfront costs applicable to the active funds were excluded it was found that active funds on average outperformed the index benchmark. However, when including these costs the index outperformed the average of active fund returns. Similarly, on a risk-adjusted basis the index benchmark fared better than the average of actively managed funds. Index investing, despite its superior performance on average, would not have been a low risk strategy and investors would have experienced volatile returns. Over time index investing and active management repeatedly replaced one another as the dominant investment strategy. A fundamentalist approach about any one of the strategies is not prudent and it is argued that an integration approach of both strategies would have yielded the highest reward per unit risk, based on past experience. When following a strategy of combining both strategies in various combinations over different investment periods, it was found that the highest reward to risk ratio was attained by increasing index investing relative to active investing with an increase in the investment horizon. Simply put, the longer one’s investment term, the more index investing should be followed. Hereby it can be argued that over the long run it is difficult for active management to consistently beat the market. Therefore, investment strategies should be aligned with one’s faith in the efficiencies of markets over time and not be overly influenced by short-term performance records of active managers.

AFRIKAANSE OPSOMMING: Die twee verskillende beleggingsbenaderings, naamlik aktiewe en passiewe (indeks) beleggingsbestuur, is beoordeel deur die gemiddelde opbrengste van die aktief-bestuurde fondse in die algemene aandeelkategorie van die Suid-Afrikaanse effektetrustbedryf met hul beleggingsmaatstaf, die ALSI indeks, te vergelyk. Verskillende vergelykende metodes is in die ontleding gebruik wat die oorsigtydperk 1988-2003 gedek het. Indien aanvangskoste by die aktief-bestuurde fondse buite rekening gelaat word, het hul gemiddelde opbrengs oor die algemeen die opbrengste van die indeks oorskry. Wanneer dié koste wel in ag geneem word, het die indeks egter die gemiddeld van die aktief-bestuurde fondse geklop. Soortgelyk, het die indeks beter as die gemiddelde van die risiko-aangepaste opbrengste van die aktief-bestuurde fondse vertoon. ‘n Indeksbenadering sou ten spyte van sy beter opbrengste oor die algemeen nie ‘n lae risiko strategie verteenwoordig nie en beleggers sou wisselvallige opbrengste ondervind het. ‘n Indeksbenadering en aktiewe bestuur het mekaar oor die verloop van tyd herhaaldelik afgewissel as die dominante beleggingstrategie. ‘n Eensydige benadering ten opsigte van enige van die strategieё sal nie deug nie en dit word eerder voorgehou dat ‘n integrasie van beide strategieё in die verlede die hoogste opbrengs per risiko-eenheid sou opgelewer het. Deur verskillende kombinasie-moontlikhede oor verskillende beleggingsperiodes te toets, is bevind dat die hoogste opbrengs per risikovlak verkry word deur die indeksbenadering te verhoog met ‘n toename in die beleggingshorison. Eenvoudig gestel, hoe langer die beleggingstermyn, hoe meer passiewe bestuur moet in die beleggingsportefeulje gevolg word. Hierdeur kan aangevoer word dat aktiewe bestuur oor die langer termyn moeilik die mark gaan uitpresteer. Indien ‘n belegger in die langtermyn doeltreffendheid van die mark glo, behoort die beleggingstrategie dienooreenkomstig daarby aangepas te word en nie volgens die korttermyn prestasies van aktiewe bestuurders nie.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/49816
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