Weekly Thoughts 16 November 2018

A couple of weeks ago I wrote a bit of a technical ‘information’ email about how unit trusts funds hold some cash. I am writing today about what are called ‘tracker funds’, unit trust funds that ‘track’ certain areas of the stock market/s. Names such as Satrix, db x-tracker, eRafi and ETFs are examples of some. These funds are weighted to hold or represent a section of the stock market, whether it be ours or overseas. The Satrix Top 40 fund, for example, has to hold the 40 largest companies on the Johannesburg Stock Exchange. The guys who manage this fund may not choose to not hold them.

So if a ‘Steinhof’ is one of these top 40 then they must hold it. And if such a company’s value might suddenly fall, they must continue to hold it while it continues to make up the Top 40. They may not sell it all on the day that they hear bad stories. Only once it disappears out of the Top 40 may they sell the rest. So in this case the fund will have to absorb the total loss of value up to this point.

An ‘active manager’ however, such as an Allan Gray or Coronation or Marriott, can choose to sell it immediately when it begins to fall or when the bad news comes out. Thus hopefully keeping some of the profits that might have already been made. Likewise an active manager can choose to start buying a small or new company, if they believe it’s of really good value and will go far. But the Satrix Top 40 fund cannot do that. This new company has to first become one of the largest 40 companies on the Stock Market before they can buy it. And by then it might be too late to make any decent profits out of it.

The negatives are that the active manager funds have higher fees, because there are more people involved – analysts and managers to pay salaries to. Whereas a tracker fund is simply a reactive process of following a given measurement, meaning far fewer people needed for decisions and hence lower fees. The correct comparison to tracker funds, which focus mainly on capital growth, is capital growth vs. capital growth, not income vs. capital growth.

So it’s a bet on getting a higher return through a personal and intellectual intervention in the management of your money vs. a reactive administration function that doesn’t require the same thought and thus costs less and therefore might do better. Many managed unit trust funds do not beat the returns of index funds. But some do – just have to find them. I do however, use a couple of tracker funds.