Written by: Jonathan Myerson, Head of Fixed Interest: RMI Specialist Managers.

The debate around the merits of passive1 versus active investing continues. Over the last few years passive investing has become more popular, as many fund managers have struggled to outperform the aggregate market as measured by different indices. The most common argument in favour of passive investing goes like this: The return on the index (let’s use the JSE All Share Index) is the change in each stock value multiplied by its relative size (weight) in the index. Given that the index is “the market”, the average return of all investors in the market has to equal that of the index itself. So, for every investor who outperforms the index, there is an investor that underperforms. The discussion then moves to finding those managers who consistently outperform the index and will continue doing this in the future. Given that finding the future outperformers is not really possible, the argument goes, rather just invest in the index. Of course, the more emotionally compelling argument, which is often used by advocates of passive investing at what might be exactly the wrong time, is to look at a certain history that proves their point.

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