Over the past decade, there has been a surge in the number of unit trusts that South African investors can choose from. Currently, there are well over 1 000 unit trusts available. Yet close to one quarter of all unit trust assets sit in the 20 largest funds, according to Morningstar. Further to this, one third of assets are invested with just three of the 44 asset management companies in South Africa.
When delving deeper into the behaviour of investors, statistics from the Association for Savings and Investment South Africa (Asisa) show that more than half of local investors’ fund assets are spread across just three of the fund categories: South African multi-asset high equity, South African equity general, and the South African interest-bearing short-term category.
This concentration of assets is a potential risk for investors.
“There are asset management companies with robust investment processes and organisational incentives closely aligned with yours, but whose brand may not be well known,” says David Crosoer, chief investment officer at PPS.
How might you incorporate these into your investment portfolio?
Good managers are not easy to find
“Perhaps the starting point is accepting that good managers are not easy to find, so investors may need to be more open minded about how to access them. If you are invested much like everybody else, and mainly favour funds everyone has heard of, are you aiming to outperform the average?” says Crosoer.
More to the point, is manager skill disproportionately distributed in just a couple of Asisa categories and management companies? What should you look for in a manager?
What to look for in a manager
When assessing a manager’s capability, it is important to consider where the manager is likely to perform best through their specialist capabilities, and whether those skills are transferable across multiple categories of investment.
Managers with shorter track records should not be excluded from the mix, but some qualitative judgement is required when assessing these managers.
“Start out by trying to select managers that you think are above average over time,” says Crosoer. “While the past is not necessarily an indication of the future, it can establish whether the managers have previously demonstrated some level of skill. Where managers can use multiple assets classes, compare them against their peers. Where managers are trying to outperform a single asset class, compare them against a market capitalisation benchmark. Try not to focus too much on recent short-term performance, or performance that happened a long time ago, but also consider why the fund might have an enduring edge.”
Fund of funds or multi-managed funds can also provide an easy entry to diversified manager portfolios. It’s important that the multi-manager can explain how it identifies above-average managers and that its track record demonstrates a more consistent performance profile.
Why you need access to different investment styles
“We believe that you should have access to different investment styles to build a sensibly diversified portfolio, without you having to expend resources to do this,” says Crosoer.
“We offer a range of single- and multi-managed funds that are carefully researched and constructed to suit the graduate professional’s investment needs, risk appetite and time horizon.”
The research-driven approach to investment, backed by a multi-manager philosophy, gives members access to the country’s top asset managers in a single solution. The resultant blend of investment styles and asset classes allows members to take advantage of opportunities at different times in the cycle, thereby optimising the portfolio diversification.
“There’s no magic number of how many funds to include in an investment portfolio, but most investors are probably under-exploiting the asset manager skill set that could be accessed in a portfolio, especially given the asset concentration in SA. While the South African landscape has encouraged asset managers to launch more funds than is necessary, it has also made it harder for investors to identify which funds have an enduring edge,” says Crosoer.
Too many manager changes could detract from performance
“Regardless of what you decide to do, remember that one of the major drivers of why you will underperform the average manager is not because you didn’t hold enough managers, but rather because you tried to make too many changes to your lineup of managers. So whatever strategy you choose to adopt, you need to commit to having confidence in your managers as the future will continue to surprise.”
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