Asset managers belong to one of two schools. On the one hand we have passive managers — the guys who “mirror” the return of certain benchmarks by buying a basket of shares to perfectly replicate it. “The principle of passive investment assumes that investors should be happy with the average and that skill does not persist in any one team or organisation,” says John Green, head of Global Client Group at Investec Asset Management.
He dismisses this argument out of hand and suggests passive strategies are flawed and costly in the long run.
On the other hand we have active managers, who do whatever it takes — within their fund mandates — to generate extra return from the cash entrusted to them. When one combines the extra returns generated by active managers with the compound interest earned on a fund over time, investors can reap enormous rewards. All else being equal, an asset manager who “tops” the benchmark by 2% each year will add 49% to the investor’s accumulated capital over two decades.
What should an investor look for when choosing an asset manager? Pieter Koekemoer, head of personal investments at Coronation Asset Managers says the key differentiators in the market place include size (measured by assets under management) and the existence of an in-house investment research team. “It makes sense to do your homework properly and understand the manager’s investment philosophy at the outset,” he says. “To succeed you must make a long-term commitment to the asset manager.” An investor who puts in the hard yards before committing to a particular fund is less likely to panic-sell during inevitable periods of market turmoil.
It makes sense to consider the consistent execution and stability of the team, too. And to do this one has to look at long-term (10 years or longer) performance. “When you consider a 10-year performance number you must make sure you are dealing with the same investment team,” warns Armien Tyer, managing director at Sanlam Investment Managers (SIM). The team could have moved on and the philosophy of the house may have changed.
Investors who focus on short-term performance are making a serious mistake. There are no guarantees in today’s volatile markets, which is why funds have to attach the “past performance is not an indicator of future performance” disclaimer whenever they advertise performance. Green says it makes no sense to chase after the winner of the latest unit trust survey when most investors — and managers — have an investment horizon in excess of 20 years. “And by adopting a longer-term view, investors also have a very useful tool in identifying which investment managers or firms are truly skilled — those who consistently outperform the market,” he says.
Those who obsess over one-, three- or five-year rankings run the risk of buying next year’s loser. Green illustrates this using the Investec Value Fund, which is rated first across all general equity, value and growth funds over 10 years and is highly respected across the industry. This successful fund drew a great deal of investor concern after underperforming for a six-month period, but those who held their positions made a killing.
Once you’ve partnered with a fund manager the real work begins. Now you have to distinguish between the myriad investment strategies, asset classes and levels of risk on offer at your preferred investment house. “The most important decision is what you actually want to achieve with your invested capital,” says Tyer. From there you can determine your risk appetite and how you may react to short-term price fluctuations.
“The starting point is to clearly define your need and decide how big your risk budget is,” agrees Koekemoer. Once this framework is in place you can begin to evaluate individual funds within an asset manager stable. He believes most private investors are best served in so-called multi-asset funds. These funds expose investors to appropriate mixes of bonds, cash, equities and listed property as determined by the asset manager.
Does it make sense to keep all your eggs in one basket, by sticking with a single asset manager? The jury is out on this question, but most professionals recommend spreading your investment across managers, especially if the amount is material relative to your overall wealth. “A well-resourced and integrated investment house is best positioned to make asset allocation decisions within pre-defined boundaries,” says Koekemoer. “Even so, many investors choose to blend multi asset funds from different investment houses to mitigate manager risk.” A multi-manager multi-asset class approach lifts the burden of deciding whether you should be selling out of or buying into equities, going offshore or coming back local, being in cash rather than bonds etc.
The key long-term driver of asset flows in the industry is the market’s expectation of a manager’s ability to deliver good performances. But investors who chase historic performance or chop and change from one fund to another in search of better returns are committing a fatal error.
You should look at an investment house’s DNA and its long-term track record. Then apply the same criteria to the funds/fund managers being considered. And then factor in your particular preferences such as a manager’s particular philosophical or management style. “Choosing an asset manager is about finding the company with a strong culture, talented people, a commitment towards excellence and that has demonstrated considerable investment ability over the long term,” concludes Green.