Index Investing 101

Active investing, index investing, or both? How does an investor choose the best strategy to meet their investment needs? The good news is we have compiled a five-article educational series that discusses all the important factors an investor should consider. You can access the five articles on the left hand menu or download the full Index Investing Educational Series here.

If you want to invest in our index funds, you can apply online with Old Mutual Unit Trusts or speak to your financial adviser about investing in an index fund. If you don’t have a financial adviser you enter your details here and one will contact you.

1. Why Index Investing? Four fundamental premises to consider when evaluating arguments for active and index investment strategies:

  • Active investing is zero-sum game
  • Active manager selection risk
  • Cost
  • Style consistency


2. Choosing an Index Tracking Manager. Some characteristics of a good index investing manager:

  • A skilled and experienced team
  • A long track record
  • Responsible investing


3. The Common Misconceptions. Some misconceptions are:

  • The higher the cost, the higher the expected performance
  • Index investing only works in efficient markets
  • Index management is an automated process


4. The Benchmark. Comparing the most prominent broad market indices in South Africa:

  • FTSE/JSE All Share Index (ALSI)
  • FTSE/JSE Capped All Share Index (CAPI)
  • FTSE/JSE Shareholder Weighted Index (SWIX)


5. Blending Active and Index Balanced Funds. The benefits of blending strategies include:

  • Lower costs
  • Diversification
  • Consistency and Peace of mind
  • Potential to out-perform


Some definitions: 

Market index – a market index is a metric that tracks the performance of a group of stocks. Some indices are designed to indicate the overall performance of the market, while others follow a particular sector. Index values help investors track changes in market values over long periods of time.

Investment strategy – it can be either active or passive. An index investment strategy aims to generate the same rate of return as an underlying market index, such as FTSE/JSE All Share Index. Investors that use index investment strategies seek to replicate the performance of a specific index by investing in an index-tracking fund. An active investment strategy is a portfolio management strategy where the manager makes specific investments (select and monitor a portfolio of assets for investors) with the goal of outperforming an index.

Index-tracking funds – these are funds that track an index or market rather than trying to beat it. These could be done through investment vehicles like exchange-traded funds (ETFs), unit trusts or stand-alone funds.