Measuring fund manager skills
Think fund managers and names such as George Soros (whose 2013 earnings was in excess of $4-billion) and David Tepper ($3.5-billion) spring to mind.
Globally, economic conditions have hardly stabilised and investors are under increasing pressure to select fund managers who can give them the most return. But is there a science to picking the right fund manager or is it a case of selecting one at random and hoping for the best?
Peter Koekemoer, head of personal investments at Coronation Fund Managers, who earlier this year won the Raging Bull award for the Management Company of the Year, believes it is imperative for investors and their advisors to always conduct a thorough due diligence when selecting a fund manager and deciding on which mandate best meets their individual needs.
He identifies three things to keep in mind — assess the manager’s performance over the long-term, have realistic expectations about what can be delivered, and sticking with the chosen manager.
“Performance surveys and industry awards generally emphasise past performance and investor flows seem to mimic this. But looking at short-term performance is not a true measure of skill. Short-term returns are incontrovertibly random. It is statistically unlikely that an asset manager will not have at least one good year in a five-year period — all managers have good and bad years.
“However, when you assess performance over meaningful periods (five to 10 years), you will find only a handful of managers who consistently deliver.” He says that the conditions of the past decade have been an outlier for all major domestic asset classes where it did not really matter in which one you were invested in.
Koekemoer believes that there is no guarantee that the future will be the same as the recent past.
“We expect the next decade to look different, with muted returns from all domestic asset classes. As such, investors need to moderate their expectations and ensure that they are aligned with what can reasonably be expected given the risk budget deployed by their chosen fund.”
Perhaps one of the most difficult things to do is to stick it out with an investment manager. It is the nature of investment where even the most successful long-term managers are bound to have challenging years. There is clearly no certainty in investment and people need to understand that it comes with the territory.
“Instead of taking corrective action by switching managers during periods of underperformance, investors should stick to their guns and remain invested with a manager for the long-term so as to benefit from those great wealth-creating opportunities,” says Koekemoer.
He believes that investors who are overexposed to a single manager will be under tremendous pressure to switch to a different manager during such periods of underperformance.
Koekemoer feels that a good rule of thumb is to not have more than 30% to 35% of the capital allocated to a single manager. “But when you decide to invest, you need to stick to your guns and remain invested for meaningful periods.”
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