Nearly impossible to beat index funds in developed markets – Cy Jacobs

Cy Jacobs

36ONE Asset Management founder Cy Jacobs said it is nearly impossible for South African or global managers to beat index funds in developed markets.

Jacobs told delegates at the 2024 BizNews Conference that they visited a US asset manager who invested with 36ONE Asset Management earlier this year.

This investment company has more assets under management than the entire South African investment sector.

They use 36ONE Asset Management as one of fifteen emerging market asset managers to get exposure to South Africa.

“Our job at 36ONE is to beat the South African emerging market index in US dollars. We have had this mandate for a decade and achieved our goals,” Jacobs said.

He said they outperformed the index by 4% to 5% annually, as did their counterparts in other emerging markets like Turkey and Mexico.

Jacobs asked whether they could meet the firm’s developed market asset managers – they were laughed at.

The firm told them that beating index trackers in emerging markets is nearly impossible. “We realised that years ago,” they told him.

He said he realised right there that, over an extended period, it is impossible for South African or global managers to beat index funds.

Jacobs said the firm’s analysis showed that only 2% of asset managers beat index funds in developed markets.

As it is virtually impossible to pick the 2% of asset managers who will outperform the market, investors are well advised to invest in index trackers.

Charlie Munger
The late Charlie Munger

Jacob’s views align with the late super investor Charlie Munger, who served as Warren Buffet’s right-hand man at Berkshire Hathaway.

Munger said denial is one factor that dominates bad decisions in humans and is clearly seen in the world of investment management.

He said only a tiny percentage of fund managers will beat indexes after costs. “Everybody else is living in a state of extreme denial,” he said.

“Active managers are used to charging hefty fees for stuff that is not doing their clients any good. It is a deep moral depravity.”

“If a widow comes to you with $500,000 and you charge 1% a year, you could put them in the indexes.”

“However, you need your 1% management fee, so you charge someone a considerable fee for worthless advice.”


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