To discover where most investors go wrong, you simply have to look at the process by which they select a fund manager or unit trust. For many people, it’s the first and often the only decision they make. Yet, according to the investment practices employed by true wealth managers and private banks, this decision is the last that should be made.
Long before choosing a fund manager, an investor should have estimated their short-, medium- and long-term cash flow needs, and selected various asset classes which would match those needs. Between 80% and 90% of investment return comes simply from correctly choosing the balance of asset classes.
Interest rate cycles
Take the following research from Acsis: just as the business cycle moves from peaks to troughs over time, so too does the cycle of interest rates. These cycles can be divided into four separate phases: low interest rates, rising interest rates, high interest rates and declining interest rates.
Historically, equity returns outperform bonds, cash and property in the low and declining phases of the interest rate cycle – which is what we are in now. Bond returns are at their best in the high and declining stages. As would be expected, cash returns are at their best in the rising and high phases of the interest rate cycle. Property returns are at their highest in the low and declining phases of the cycle, according to Acsis.
Quantitative versus qualitative
Having chosen a fund based on asset selection, choosing a fund based on awards becomes an interesting diversion. Unless a fund consistently wins an award, you need to interrogate the methodology by which the fund is being judged. The reason is that most awards are based purely on quantitative metrics so if a reasonably good fund underperforms for a short period of time (and most do) they will be penalised for this. It may be better to look at the qualitative characteristics of a fund in conjunction with these awards to get a well-rounded idea of what you may be purchasing.
Evan Jones, MD of Cadiz Wealth, supports this view: “It should be noted that the primary driver of investing with fund managers is not performance: it is in fact more the sensory drivers which attract investors to a fund management company; aspects such as service, values, integrity, responsiveness.”
Performance versus risk
Candice Paine, head of retail at Sanlam Investment Management takes up the question of what makes a good unit trust. “A good unit trust is one that delivers consistent performance within the parameters of a fund’s mandate and doesn’t cost the earth. Performance needs to be understood in terms of the long-term averages for each asset class.
“Managing money is a skill founded on years of experience and an inherent feel for the markets. Performance is obviously key within the mandate of the fund. But one can’t ignore risk. A good manager is aware of the risk that is being taken on with each trade and how each position could play out in the performance of the fund. It is important that a money manager has a sound investment philosophy that he adheres to and this is borne out in his process and implementation. Discipline is very necessary when managing money,” says Paine.
“Choosing to invest in a unit trust, especially one which has a large equity bias should be for the long-term. As such, trying to select the top performing fund over every period is a near impossible task. What you should be looking for is consistency of performance and investment philosophy.
“Fees are also important. Over long periods of time, excessive fees can have a material impact on performance so make sure you aren’t overpaying for the fund you choose,” explains Paine. Because it does not splash out a lot on advertising and brand building, few people realise that over the longer-term, Cadiz is the top-rated portfolio manager over numerous time periods. Its philosophy is caution, and an emphasis on protecting clients’ capital.
Hold onto your shares
Gary Poultney, portfolio manager at Sasfin Securities, says: “People who have bought good quality shares and just held on to them have invariably done remarkably well over the years.
“During volatile times like this, some clients suggest they either sell out of the market, or sell selectively to buy back at a lower price. That’s a difficult issue that incurs costs and tax, and requires that one gets the timing right. We don’t advise that unless the client actually needs the money. Successful investors don’t sell,” says Poultney.
Today, most large asset managers such as Sanlam, Old Mutual, Momentum and Stanlib offer the full spectrum of investment styles, philosophies and specialist funds. Their ability to outperform the market therefore depends not on an investment philosophy, but on attracting the best people and sticking to investment basics. Others, such as Allan Gray and Coronation, stick to a single investment philosophy such as value, as does Sanlam, despite being a multispecialist house.