| 2016 | 2015 | 2014 | 3 years | 5 years | 7 years | |
|---|---|---|---|---|---|---|
| High Equity | 2.0% | 9.1% | 12.9% | 7.9% | 13.5% | 13.1% |
| 60% Equity | 2.4% | 9.1% | 12.8% | 8.0% | 13.0% | 12.7% |
| Medium Equity | 3.1% | 9.0% | 12.6% | 8.1% | 12.6% | 12.3% |
| 40% Equity | 3.8% | 9.1% | 11.5% | 8.1% | 11.7% | 11.4% |
| Low Equity | 4.7% | 9.0% | 10.2% | 7.9% | 9.9% | 9.8% |
| Defensive | 6.2% | 8.1% | 8.5% | 7.6% | 8.8% | 8.7% |
| SA Inflation (CPI) | 6.8% | 5.3% | 5.3% | 5.4% | 5.5% | 5.3% |
10X return relative to benchmarks
As index investors, we target the benchmark return for each chosen asset class. The difference between the benchmark and actual return is the so-called “tracking error”. This relates to trading costs (mainly brokerage, securities trading tax and international investment costs) and “cash drag”. Cash drag arises from the time delay between receiving and investing funds. It represents the opportunity cost of not being fully invested in the asset class and it can be positive or negative.
We report on the 12-months tracking error for each 10X portfolio in our Annual Review. The portfolio’s benchmark return is the sum of its different asset class benchmark returns, multiplied by their actual weighting in the portfolio over the period.
The graph below shows the tracking error for the 12 months ended 31 December 2016, broken down into trading costs and cash drag. The black line shows the net tracking error. This can be positive or negative but either way, our aim is to keep it as low as possible. The returns published by 10X are net of this tracking error.
Fig x: 10X tracking error – 12 months to December 2016
10X return relative to average large fund manager return
We also monitor our performance against the average monthly return delivered by the large retirement fund managers, according to the Alexander Forbes Large Manager Watch Survey (LMW). 10X’s goal is to at least match the average fund manager’s return over time, before fees (on the premise that 10X’s lower fees, will then deliver an above-average return for the investor).
The 10X High Equity Portfolio has consistently outperformed the average return of large fund managers (before fees) since inception (1 January 2008). 10X’s total fees are generally half the industry average(1) and so 10X saves most clients at least 1% pa (of the investment balance) in fees. We thus also show the average return of large fund managers reduced by a 1% higher fee to show the effect of the fee differential.
(1) National Treasury, Charges in South African retirement funds , July 2013
| Returns to 30 November 2016 | 10X High Equity (before fees) | Large Manager median return (before fees) | Large Manager median return (after fees) | 10X excessreturn |
|---|---|---|---|---|
| 1 year (%) | 1,1% | 2,3% | 1,2% | -0,2% |
| 3 years (% pa) | 8,9% | 8,3% | 7,3% | 1,6% |
| 5 years (% pa) | 13,3% | 12,8% | 11,6% | 1.6% |
| 7 years (% pa) | 13,4% | 12,7% | 11,6% | 1.8% |
| Inception Jan 2008 (% pa) | 11,3% | 10,5% | 9,4% | 1.9% |
Source: Alexander Forbes Global Manager Watch (to Nov 2016), 10X Investments Umbrella Pension Fund. *annualised
10X ranking relative to individual fund managers
We also compare our long-term performance against that of individual fund managers. Our goal is to beat, or at least match the return the median annual return (before fees) of the fund managers with a seven-year record in the AF Large Manager Watch (Global BIV category).
In so doing, we also highlight the potential upside from picking the winning fund manager against the potential downside of choosing the worst. Investing in index funds is not merely about low fees, but also about avoiding the risk of choosing a poorly performing fund. The downside risk is invariably much greater than the upside potential, especially once the higher return is adjusted for higher active management fees. To provide an indication of our likely after-fee ranking, we boost the 10X return by 1%.
We also remind that the median fund manager return becomes inflated over time, as the funds exiting the survey are habitually those that have performed poorly. This so-called survivorship bias makes historical active management results look better than they are.
