South Africans might not be the best savers, but we’ve still tucked trillions of rands away for a rainy day.
Retirement fund assets topped R2-trillion by March 2010 and our collective investment schemes industry had R868-billion of assets under management by September 30 this year. With pension funds numbering in the thousands and 937 unit trusts , local investors face a major headache when deciding where to invest.
The pension fund decision is usually made by employers, and employees can typically influence only the level of monthly contributions and, more recently, investment choice. If you use retirement annuities to bolster your retirement funding your choices are endless.
You can purchase retirement annuities through just about any large life insurer, or you can build and manage your own retirement savings vehicle through an investment platform such as that offered at www.equinox.co.za. The Equinox Retirement Annuity product offers online real-time access to your retirement portfolio.
Another popular retirement solution is to invest through one of the many linked investment services providers (LISPs). An LISP allows you to make monthly contributions as well as single annual “top-ups” and makes it easy and cost-effective to switch between funds.
Thanks to the internet, investors can purchase shares in markets around the globe, buy unit trusts, funds of funds, hedge funds or make private equity investments with a few mouse clicks — without assistance from bank managers or personal financial advisers.
You might feel you’re in charge of your money, but the reality is that each unit trust, private equity or hedge fund you sweep into your personal retirement portfolio is managed by a team of investment professionals. These fund mangers will make the critical “make or break” decisions with your invested capital.
There’s no better way to examine the role of fund managers than to consider the unit trust industry. South Africa’s unit trust industry is superbly managed and regulated, and there are already more than 30 dedicated fund-management companies overseeing the 937 funds.
You’re probably familiar with most of them; they include Absa Fund Managers, Coronation Fund Managers, Investec Asset Management, Old Mutual Unit Trust Managers, Nedgroup Collective Investments and Stanlib.
What do these management companies do?
Fund management is the art of managing investor funds to ensure performance against a particular benchmark. Each of these fund-management companies employs fund managers to preside over funds in their product stable.
A fund manager has to determine the mix of asset classes and specific investments under each of those asset classes in line with the fund’s investment philosophy, to perform against a predetermined benchmark.
Can a fund manager make a major difference to your long-term return?
You bet they can. Commenting on the latest Alexander Forbes SA Manager Watch, Trevor Abromowitz, head of the Alexander Forbes investment cluster, was quoted in the Financial Mail as saying that there had been two schools of thought this year: managers such as Allan Gray and Re:CM felt the market was too expensive and held an average 55% equity weighting, whereas others, such as Coronation and Foord, held more than 70% of their balanced portfolios in shares.
Needless to say, the equity-heavy funds significantly outperformed thanks to the 21.1% return from South African equities in the 12 months to September 30 2010. Other asset classes performed impressively too: listed property (+29.7%) and bonds (+15.3%).
“The primary role of a fund manager is to provide the vehicle and expertise through which the savings of either institutions or private investors is channelled,” says Louis Niemand, an investment specialist at Investec Asset Management.
Investec has about R550-billion invested across its various funds, though 50% of this total is courtesy of the group’s global operations. South African unit trusts funds typically have 80% of assets locally.
“But the crucial thing that a fund manager gives a retail investor is the asset allocation call,” says Craig Chambers, managing director of Dibanisa Fund Managers. Local investors have access to dozens of international fund managers too.
Mike King, director for Africa at Franklin Templeton Investments, says: “We’re not a sexy fund house — and we’ve always managed our clients’ assets conservatively.” The company manages $644-billion for 23-million clients worldwide.
“Our philosophy is to have local portfolio managers on the ground in as many of the countries we have exposure to as possible.” The company has about 400 asset managers scattered across the globe, trading 24 hours a day.
Some fund investment houses employ what’s known as a house view — a rigorously enforced investing-style that is applied to all the funds in its stable. “A value house will only focus on value investment style principles whenever they purchase an asset,” says Niemand.
Investec, however “created a multi-specialist investment house,” says Niemand, “which allows us to offer a value fund with a portfolio manager that is responsible for value investing, but if his views differ from the broader team, the final decision is based on his knowledge and his perception and his philosophy.” No discussion about investments is complete without an active versus passive debate.
A fund manager is by definition “active” –making frequent decisions to maximise investment return. But as the investment arena evolves, local investors are increasingly able to choose passively managed investments, also called index trackers.
The success of locally listed exchange-traded funds is a case in point. Investors have been using these investment vehicles (25 funds at last count) to lap up units in major JSE indices (the FTSE/JSE Top 40, for example) or commodities (the Absa Capital New Gold Issuer Debenture). The trend in the investment space is towards greater transparency.
The publication of total expense ratios by local unit trust funds has made retail investors more aware of the costs associated with their investments. Says Chambers: “You can find the perfect product and risk solution for an individual’s risk appetite and return expectations, but if you’re paying 300 basis points per month in fees on your retirement annuity you’re on a hiding to nothing.”
Investors will always be prepared to pay a little extra to get the best fund managers working for them. But those with time are increasingly opting for the cost efficiency and transparency of passive solutions.