So what if your unit-trust house won no awards?
Accolades may affirm that your fund delivers returns, but this should not be the sole basis on which to choose a fund
Investec won the award for the best larger unit trust house at the Morningstar awards last week, while Fairtree clinched the award for the best smaller house.
Just a month earlier, at another major unit trust industry award ceremony, MiPlan won the award for the best unit trust house (large or small) and Nedgroup Investments was crowned the best offshore manager for 2019.
Morningstar last week made individual fund awards for the best equity fund investing predominantly in SA to Kagiso Equity Alpha Fund, for the best high-equity multi-asset fund to the Kagiso Balanced Fund, and for the best global equity fund to Nedgroup Global Equity Fund.
In the same categories, the Raging Bull Awards also recognised the Kagiso Equity Alpha Fund, but gave its leading award for a multi-asset fund to the Investec Managed Fund and its offshore fund award to the UK-domiciled Fundsmith Equity Fund.
The differences in the awards are a product of their different methodologies — measurement periods may be three- or five-year periods, periods may be weighted, returns may be straight or adjusted for risk.
When it comes to the awards for the best houses, these are made on the basis of risk-adjusted performance across the manager’s range of funds but rules differ around the number of funds, which ones qualify and the performance measures.
While both awards try to ensure winning funds and houses are consistent performers, the awards still take a snapshot in time and look back at past performance.
As the warning goes, past performance is no guarantee of future performance, and to know if a manager will continue to perform you need to look less at the numbers and more at the quality of the manager.
At most, these accolades may affirm that your chosen fund is one that delivers returns and has an investment philosophy that works, but this should not be your starting point or the sole basis on which you choose a fund.
You should begin by identifying funds that suit your investment needs, your time horizon and both your ability to withstand temporary losses as well as your ability to tolerate or stay invested in funds whose returns may move up and down with the markets.
When it comes to choosing the manager, take some lessons in what to look for from professional fund buyers such as discretionary investment managers who put portfolios together for financial advisers’ clients, or from managers who outsource the management of their funds to other managers.
Victoria Reuvers, MD of Morningstar Investment Management — the local discretionary investment manager in the group — says there are five key criteria to consider about a manager, and past performance is probably the least important when it comes to making decisions about future investments.
Performance is often a by-product of the other important characteristics: an ethical parent company; a clear investment process; a solid investment team and a fair price for service, Reuvers says.
If you understand a manager’s particular philosophy and edge, you will be more confident about staying invested to benefit over the full cycleNic Andrew, head of Nedgroup Investments
There isn’t a single right way to manage money or to be sure of investment success, but you need to know if your manager got lucky or is skilled.
To determine if your manager is skilled, it should have an investment process that is easy for you to understand, repeatable and consistently applied, Reuvers says.
You should see evidence of that process in the fund’s holdings and past performance, she says.
Nic Andrew, the head of Nedgroup Investments, a manager who researches and selects what it regards as best of breed boutique managers, says Nedgroup does not consider a manager’s performance over the set periods that are used to determine fund awards.
Instead, Nedgroup considers a manager’s long-term track record through full market cycles (from bottom to bottom or from peak to peak) and over rolling periods that are appropriate for the fund’s mandate — for example, rolling two- and three-year periods for income funds and rolling five- and seven-year periods for equity funds.
Both Reuvers and Andrew say your fund manager should tell you under which market conditions the fund is likely to perform well or badly.
If the fund’s performance is inconsistent with this expectation, the manager is not sticking to its process, and this kind of behaviour is likely to result in poor performance over time, Reuvers says.
Andrew warns against managers who abandon a particular investment philosophy when it is not performing well or who stray from their area of competence. New investment tactics may be adopted at exactly the wrong time, resulting in the persistent underperformance, he says.
Andrew says if you understand a manager’s particular philosophy and edge, you will understand that periods of short-term underperformance inevitably occur from time to time and you will be more confident about staying invested to benefit over the full cycle.
There has been significant research showing that regular switching and chasing past winners is common but has a devastating effect on the returns investors earn, Andrew says.
Individual managers should have ‘skin in the game’ in their fundsVictoria Reuvers, MD of Morningstar Investment Management
Experienced, stable team
Both Morningstar Investment Management and Nedgroup don’t only look for experienced managers, but for a stable team. A stable team is a crucial ingredient for replicating success, Andrew says.
Individual managers should be incentivised in a way that rewards them for delivering the returns the investment house is targeting over the relevant period and should have their own money invested in their funds — “skin in the game”, she says.
There is a direct correlation between how much money a fund manager has invested in the fund he or she manages, how well a fund performs and how long a fund manager stays with an asset manager, Morningstar’s research has found.
Andrew agrees that managers’ interests should be aligned with those of investors — typically owner-managed boutiques whose key players have invested material amounts of their own money in their portfolios and are completely reliant on robust long-term performance to succeed.
Nedgroup prefers managers who are skilled in a particular area and have an identifiable edge that is sustainable, Andrew says.
These managers typically choose individual shares (bottom-up stockpickers) based on their fundamentals and valuation (price relative to earnings) and know how to construct a portfolio, he says.
A good company
Both Morningstar and Nedgroup assess the character of the company you are investing with, to find out whether it will treat your money as if it is its own and put you, the investor, first.
The manager’s focus should be on delivering performance and not on marketing or launching new fad products.
“We understand that ultimately companies want to generate profits, but what we really want to know is where you, the investor, feature on their spectrum between salesman and steward. We are looking to invest with companies who are good stewards of investor capital and will place investors’ interests first long after you have trusted them with your savings,” Reuvers says.
Morningstar considers the manager’s corporate culture, the staff turnover, the incentives offered to managers, whether the company contravenes regulations or is being sued, and the fees the manager charges.
Andrew says successful fund managers are also willing to close their funds or businesses when they get too big, because they know the size of assets under management — especially in a small market such as SA — can affect performance.
Morningstar’s research has shown that the fees charged by a fund are often the best predictor of their future performance, because the higher the fee, the higher the return your manager needs to earn to deliver you market-beating after-fee returns, Reuvers says.
She says Morningstar will check if a fund has a performance fee structure that is fair to you, as an investor, and not asymmetrical and skewed in the fund manager’s favour.