Smart Investing
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The Chinese calendar says this is the year of the dragon. Less auspicious perhaps but for Australian investors this is shaping up as the year of fixed income.
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By taking a few simple steps, super fund members can both boost their retirement savings and legally minimise tax on their super – for themselves and their beneficiaries.
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Self-managed super funds seem set to remain by far the preferred superannuation choice among higher-balance members – particularly those in retirement.
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This is a question that many investors are, not surprisingly, asking themselves. But what might surprise some investors is that the answer is not as elusive as it may at first seem.
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Changes to the ASX operating rules to allow fixed income Exchange Traded Funds (ETFs) to trade on the Australian market will open a new means for investors to efficiently, conveniently and inexpensively diversify their investment portfolios.
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News & Commentary
Moonwalker 08 Apr 10
Ben Johnson, a senior stock analyst with Morningstar Research in the US, argues in a recent paper that a desire to beat the markets through active investment management shows the same “intrepid spirit” that sent Neil Armstrong to the moon.
And he says it shows the same spirit behind Sir Edmund Hillary’s climb to the peak of Mount Everest.
Johnson makes his analogies in a carefully-reasoned argument of why Exchange Traded Funds (ETFs) provide an attractive, low-cost alternative to actively-managed funds.
Read his paper, headed Active Versus Passive Management.
“While some [active] managers will beat their benchmarks some of the time,” Johnson writes, “the persistence of superior returns has been shown to decay fairly rapidly over. And [this superior performance] is owed in a large part to the positive momentum of previously selected outperforming stocks.
“So last year’s winning [active] fund will likely have a difficult time staying on top,” he adds.
Johnson supports his case in favour of passive investment by pointing to several well-known research papers including The Arithmetic of Active Management by US economist William Sharpe who won the 1990 Nobel Prize in economic sciences
In that 1991 paper, Sharpe wrote that on a mathematical basis, the average passively-managed investment will outperform the average actively-managed investment over time.
Other points made by Johnson include:
- Active managers that do succeed in outperforming the market on occasions tend to have their excess gains “eaten up by fees”.
- Many active managers – fearing below-market performance – adopt approaches that have lead to them being tagged as “closet indexers”.
Smart Investing has long discussed the strategy of using ETFs as the core of equity portfolios and then investing in actively-managed funds or direct shares as “satellites” to that core.
And an increasing number of investors see a place for passive and active investment management in their portfolios, using the core-and-satellite strategy.
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What can I do next?
- See Prices & Performance data for ETFs
- View ETF Offer Documents and Reports
- Read ETF Announcements
- Learn more about Exchange Traded Funds
- Contact Client Services
