Your financial planner may not be an investment specialist, but he or she should be able to identify fund managers who can deliver on your goals, say Financial Planner of the Year for 2015, Wouter Fourie, of Ascor in Pretoria, and one of the runners-up, Mark MacSymon, of Private Client Holdings in Cape Town.
“The ideal fund manager is somebody who can consistently achieve the fund’s growth benchmark at acceptable levels of risk and is able to protect capital when markets are falling,” Fourie says. He takes into account the following when selecting a manager:
* Track record.“Generally, past manager performance provides no indication of future performance,” Fourie says, “but it provides you with enough insight and information to determine if the fund manager is skilful or just lucky.”
* Qualitative analysis. This looks at the asset management house, the investment team and the philosophy and process behind the management of the fund. “Ensure that the fund manager has an investment style that you understand and which is applied consistently during all market cycles. Also, check that the fund managers have their own money invested in their funds,” Fourie says.
* Quantitative analysis. This looks at the performance, consistency, risk and drawdown levels, and correlation of the funds.
“This is not a game of chance, but a very important selection process, which will have a significant impact on your long-term goals. Switching managers regularly often erodes returns – you are trying to ‘out-think’ the specialists at their own game,” Fourie says.
MacSymon says one quality of a good manager is the ability to apply a consistent investment framework over full market cycles, while being mindful that the fundamental drivers of economies change over time. A good example, he says, is the change in the United States technology sector.
“In 1990, the US technology sector was dominated by a handful of companies, with Apple accounting for 3.8 percent of the top 100 firms in the sector by market value. At the same time, IBM weighed in at a whopping 49.2 percent of the tech sector. Now, 25 years on, the picture looks vastly different. Apple, now the biggest company in the world by market capitalisation, accounts for 19.6 percent of the sector and IBM a more modest 4.4 percent. Facebook and Google now account for more than 13.5 percent of the sector, but they were both non-existent 25 years ago,” he says.
MacSymon says that a good fund manager is one that has vision and acknowledges that just because a company is cheap, it doesn’t mean that it is a good investment.
“In addition, if a portfolio is positioned to perform on the basis of a very narrow or very particular global economic outcome, such a view should raise concerns and prompt further investigation. I am not saying that it’s bad to have a conviction on a particular outcome, but, in my view, it is reasonable to position a portfolio so that it balances the likelihood of a set of possible economic outcomes,” he says.
“Take Steve Romick, now award-winning US contrarian value manager of the Nedgroup Investment Global Flexible Fund, among others, whose fund was 59 percent behind the market in 1998 and who lost 85 percent of his investors. Although the fund subsequently outperformed the market by 84 percent, he learned and adapted his value strategy to perform well over full market cycles, saying, ‘I’d rather perform well over time than for just a moment in time.’”