Mon | Dec 11, 2017

Oran Hall | The Jamaican stock market and index funds

Published:Sunday | August 6, 2017 | 12:00 AM

QUESTION: I'm a Jamaican living in Asia and I'm exploring the idea of investing in stocks and bonds. I have been trying to learn the basics and have decided that I want to invest in a portfolio containing the JSE Combined Index and the JSE Market Index, with a ratio of 60:40. I don't want an actively managed fund. I don't want to buy individual stocks or bonds. I want to buy the entire market, invest consistently, and rebalance once a year (so that stocks are 60 per cent of my portfolio). So, I have two questions: How can I find an institution or broker that will facilitate a fully indexed portfolio? Are there robo-advisers that allow investors to buy into the JSE?

- Didan

FINANCIAL ADVISER: It is clear that you have a strong preference for the passive approach to investing, but the securities market in Jamaica has not yet developed to the point to facilitate you and other persons who embrace your approach. Unfortunately, we do not have a JSE index fund.

Passive investing aims to reduce investment management fees using a buy-and-hold system. In many cases, indexing is the method used. This means selecting a market index and replicating it by holding securities that make it up in the same proportions that these securities are weighted in the index. The portfolio effectively mimics the index.

Usually, the index selected is a broad, diversified one, but sometimes, a fund may track a smaller or more specialised index. Alternatively, the portfolio may buy a subset of the index securities and thereby reduce the costs associated with maintaining exact investment proportions in large portfolios.

Indexing a portfolio reduces the cost of running it. No investment advice is needed ,and a computer programme can provide all the information needed to keep the portfolio on balance so that not much is required in the way of trading and managerial expertise.

Management fees and other administrative expenses are reduced and are generally much lower than those on actively managed funds.

But there are still management fees and costs so that over time, the net return of the fund is less than the return on the index it follows although index fund performance before the deduction of fees closely resembles the performance of the market index that it mimics.

In jurisdictions where there is capital gains tax, index funds are tax-efficient as securities are only bought or sold when they are dropped or added to the index, so realised capital gains seldom flow through to the investor.

Although the term index fund has traditionally been associated with passive management, there are some index funds that are partially active. What makes them attractive is the prospect of added returns from active management, plus the appeal of lower operating costs.

One type of partially active index fund is the enhanced index fund, which holds the securities in a stock index but which allows the manager to make modest sector adjustments, moving disproportionately into resource stocks when the manager believes that the sector will do very well. As an alternative, the manager may overload particular stocks rather than sectors.

For most funds, though, the manager may not deviate too far from the index weightings, and, therefore, performance is similar to the index.

There are cases in which it is necessary to rebalance an index portfolio to keep up with the index weights as adjustments have to be made to adjust for changes in the number of securities outstanding.

I am not aware of any robo-advisers that is, providers of automated investment solutions that allow investors "to buy into the JSE".

Your preferred approaches to participating in the securities market favour ease of management and cost minimisation but do not accommodate customisation and do not have a place for the human element in fashioning emotionally successful financial outcomes and solutions.

If the primary reason for your approach is ease of management because you do not have the time and are not confident that you have the required expertise, you could consider a discretionary management arrangement with one of the wealth managers/portfolio managers based in Jamaica, notwithstanding the position you outlined above. There is the element of cost to consider, but some shopping around could help in identifying good and effective service at a reasonable price.

The key is completing a well-constructed Statement of Investment Policies and Principles/Procedures (SIPP) to provide the basis for investing your funds in a way that is suitable for you and best meets your needs. I hope you will still consider participating in the securities market of your home land.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com