Tuesday 22 November 2016

Invest cheaper than the index… it’s possible!

I love indexing. I think it is a great investment strategy for anyone who doesn't want to spend one second thinking about their investments. In my opinion, if you are disciplined and buy an index fund every month of your entire career, you should have a great investment outcome.

I also dislike active investing. I have made these thoughts known before. I think 10x do a great job summing up the futile hunt for alpha here.

So what do I do? I kind of sit in no man's land. I take the low costs and low portfolio turnover aspects of passive that I like. I make a commitment to spend a couple of hours a week managing my portfolio. I buy well-known companies (not too dissimilar to what lives in an index) who can on average grow their dividends ahead of inflation. I don't sell companies. I am not a serial dater. I like to be married to them. I have a clear objective. I am not trying to beat the market but instead trying to build a passive income stream. All of this I go through in detail in Forget the Noise.

I have got a bit side-tracked. The reason for this post was fees and indexing. I was interested to calculate what fees I am paying on my investment. Before, I tell let's look at two Satrix index funds.

Satrix All Share Unit Trust

The Satrix ALSI Index Fund tracks the performance of the FTSE/JSE All Share Index. The index constitutes the 160 largest companies, by market capitalisation, listed on the JSE. The larger the company (by market capitalisation), the larger the weighting of the company’s share in the index. (source: Satrix website)

Management Fee direct to retail investor: 0.513% including VAT
Management Fee via LISP: 0.285% including VAT + LISP fee of 0.50% to 1.00% (Expensive!)

Satrix Balanced High Equity Unit Trust (good proxy for my portfolio)

The Satrix Balanced Index Fund complies with all limitations of Regulation 28 and offers diversified exposure to all the key local and international asset classes, with a smart SA equity core. The fund tracks the proprietary or custom Satrix Balanced Index and invests in a range of underlying smart equity indices: FTSE/JSE Dividend Plus Index (value exposure), FTSE/JSE Equally Weighted Top 40 Index (size exposure) and Satrix Momentum Index (momentum exposure). All asset classes, constituting components of the composite index tracked by the portfolio, are tracker products (except for domestic cash). (source: Satrix website)

Management Fee direct to retail investor: 0.684% including VAT
Management Fee via LISP: 0.399% including VAT + LISP fee of 0.50% to 1.00% (Expensive!)

My Portfolio

You may be amazed to know that the total fees I am paying on my portfolio are 0.28% including VAT. The vast majority of these fees are monthly bank charges. I have included all costs other than brokerage (I have done the same for the unit trusts). I don't trade a lot and brokerage adds a relatively immaterial cost and limited to purchases only. 

Secondly, as my portfolio grows my costs are fixed. This means that the 0.28% is only going to get lower. I can see a time when I am paying less than 0.10% per annum! In a index unit trust or ETF, fees are tied to AuM so costs are not fixed.

Contrary to popular belief, you can construct your own portfolio far cheaper than any index fund in the South African market. A good place to start is EasyEquities by Purple Group. They charge 64c per R100 of trade and no monthly fees. You won't find a more affordable stockbroker in South Africa.

I am not knocking index investing. It is a great strategy! My point is that you can build a diversified portfolio with an inflation-hedged income stream which costs less than an index fund in South Africa. You just need to be prepared to spend a couple of hours a week on your portfolio. If you don't want to do that, then please index away!

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