This can either take the form of a benchmark, an absolute return target or, in many cases, might even take into consideration the performance of a peer group, extracted from an asset management survey.
But how useful are these performance surveys? Do they lead to better decision-making regarding manager skill and the subsequent returns an investor can enjoy? Most academic studies in the US suggest that persistence in asset manager returns is hard to establish and that the average US asset manager matches the benchmark only after costs, which suggests that survey-gazing might be a fruitless exercise.
Despite this, in the pursuit of higher returns, most investors continue to seek asset managers that can beat benchmarks and their peers. The question is, therefore, “what needs to be known about surveys to make looking at them more meaningful?”
So what can investors do to ensure better decision-making when it comes to manager selection? Firstly, it is imperative that investors understand something about the fund that they are invested in and what the asset manager says about a particular fund.
Here good questions to ask include: does a limited investment universe suggest returns that are not consistent with investment objectives? Or does the overall investment philosophy and objective fit in with the investor’s objective?
Once a simplistic qualitative study is made of the fund, it is important to understand the numbers. Remember that past performance is not an indication of future returns, so make sure that whoever manages the fund is at best the original manager or, alternatively, his/her successor who will continue with the same philosophy and thinking. Once a decision is made, it is important to see that decision through for the long term. The best place for fund data is always the bottom drawer, where it cannot be perused all the time.
Equity markets and manager performances are always going to be volatile in the short term, but will always beat other asset classes over the long term.
It also has the added benefit that investors will start using surveys more sparingly and won’t try to better their returns by switching from one fund to another. The only time such a decision becomes warranted is if an investor’s objective becomes irreconcilable with a fund’s objective and where a change will allow for an alignment to occur again. This points to the importance of the qualitative factors, and not the performance survey, as a guide to decision-making.
Investors compare funds against one another and by virtue of their returns decide which is best. It can be argued that a good starting point in understanding returns is by engaging in a qualitative analysis of each fund. Even though that goes far deeper than what is discussed here, what is important is that any member of the public can use the tools that are discussed, whereas an in-depth qualitative analysis requires far deeper analysis and even on-site manager visits.
Qualitative differences: even though there might be many more funds in the General Equity classification, nine of these have histories that extend beyond 15 years.
Simply by looking at the marketing material you can quickly establish that four out of the nine funds are marketed as medium to long-term investments, which should result in superior returns. Three funds are marketed as long-term investments and there are two funds which are sold as lower risk coupled with superior returns.
Two of the nine funds are SRI (Socially Responsible Investing) funds, which alter their investment universe relative to the other funds. Even though most of the funds make use of the all-share index (Alsi) as a benchmark, there is one that uses the Top-100 index as its benchmark, altering its investment universe relative to its peer group.
What is evident is that the starting point for funds is not always the same and certain funds might exclude certain assets because of overall fund objectives. An investor should understand that these differences can influence which shares end up in a portfolio and, ultimately, what returns will be enjoyed. So material differences make a comparison between them quite difficult already.
Some conduct research into the calendar-year returns for the manager universe and, even though investors use far shorter periods to understand manager skill, looking at calendar-year returns does paint an interesting picture. If investors had to make a decision about an asset manager in 1993, their choice almost naturally would have been RMB, Investec or Old Mutual’s investors fund — but definitely not Futuregrowth as its return was ranked last.
Regardless of choice, investors would have endured good, fair and bad returns relative to competiÂtors. The one exception is Investec, where there has been no evidence of bad periods, but where only good and fair returns have been recorded. Having chosen the Old Mutual investors fund would have left one with an overall non-market-beating poor result in the 15-year period. It would also have resulted in quite a few bad years (1995 to 1997), thus suggesting a poor choice.
Turbulent and negative markets would have aggravated this further. Downturns in 1997, 1998 and 2002 could have instilled the belief that equities is a bad asset class and should therefore be abandoned in favour of other alternatives. All of these factors are enemies to long-term compounded returns, which could have possibly belonged to an investor.
Because investors evaluate asset managers over such a short period of time, investors would have experienced a feeling marketers call “post-purchase dissonance”. This is that feeling one gets after having bought something that, somehow, the qualities that were thought to be included in the price are somehow lacking. What all marketers strive for is a reduction in this feeling, which has to effect happy consumers and, with luck, repeat purchase consumers.
Investors do exactly the same thing with the funds they purchase. As a matter of fact, the review time period of 12 months is far longer than the quarterly or even monthly review time frame that most investors use. If the frequency of review increases, so too does the variability in returns between asset managers and the likelihood that an investor will experience post-purchase dissonance. The net effect will be investors chopping and changing — firstly between asset managers and secondly between market exposure and cash if a bear market is experienced.
Longer-term returns allow one to distil the noise from a manager’s returns to understand more about their specific philosophy at work. In the previous 15 years Investec, RMB and Futuregrowth were the top-performing managers, with both Investec and Futuregrowth continuing to perform within the top-four managers over all of the periods.
For those investors who were able to stay the course with the right manager, there seem to have been rewards, regardless of the year-on-year performance fluctuations between the managers.
Cobi le Grange is an investment analyst at Acsis, an independent financial services group