If your fund manager delivers poor returns over a period - even a protracted one - it doesn't always mean it's time to dump them and move to a new manager.

In fact, a manager's poor performance may well be followed by strong returns and disinvesting at the very lowest point may make you lose out on the recovery and realise an investment loss.

But there are managers who deserve to be fired, say those who research fund managers. The trick is to know one from the other.

One highly regarded offshore manager, Orbis, recently had to explain its poor returns to local investors attending seminars hosted by its sister company, Allan Gray. Orbis manages Allan Gray's rand-denominated foreign funds and the offshore allocations of Allan Gray's balanced and equity funds.


The return of the Orbis Equity Fund over the year to June 30

Morningstar reports that the Orbis Global Equity Fund returned -9.15% for the year and 2.64% a year for the five years to the end of June. It's 10-year return is 8.51% a year, giving it 44th position out of 107 global equity funds available to local investors.

But Matthew Spencer, head of the investment counsellor group at Orbis, says this kind of underperformance is a by-product of the manager's contrarian value style.

Though the manager admitted to some bad stock picks, Spencer says it is still invested in most of the companies that have caused the recent negative returns because it believes these shares will recover.

Shares it has avoided because they are not trading below the value of the company - the popular and expensive technology shares Facebook, Amazon, Netflix and Google - have earned other managers extremely good returns over the past decade, causing Orbis to underperform its peers.

So should investors give up on this manager?

Anil Jugmohan, senior investment analyst at Nedgroup Investments, which is constantly on the lookout for the best managers to manage its funds, doesn't think so.

"They are a fantastic manager. Their performance is quite volatile but over the long term they have done exceptionally well, outperforming most managers over 10 and 15 years," he says.

Leigh Köhler, head of investments at Glacier, says Orbis remains on Glacier's recommended list. Its current poor performance is in line with its investment philosophy and style. The value style has been out of favour for a few years now and if Orbis was performing well, Köhler says he would be worried.

Knowing your manager's style and how and why it will perform are key to understanding any periods when it underperforms, Köhler and Jugmohan say.

Different funds perform in different market cycles. If you want more consistent returns you need to invest across managers with different styles, Köhler says.

Joanne Baynham, the director and head of strategy at MitonOptimal, which sets up investment portfolios for financial advisers' clients, says if a manager is good at its job but its style is out of favour, stick with it.

If the poor returns are
a style issue, you must
wait the cycle out

In fact, she says, the time to buy into a value manager's funds is precisely when its performance has put it among the managers who rank lowest on performance.

Jugmohan says if you judge managers on performance only, you may well fire a manager just when it is about to deliver its best returns, and investors make this mistake time and again.

Jugmohan recently plotted the annual returns of managers over three years to the end of December 2015 against the annual returns over three years to the end of December 2018 and found most managers had very different returns in each of these periods.

Köhler says if you select five managers who have, for example, performed well over the past year, you should remember that good performance may reflect managers with the same style benefiting from a stage in the economic cycle. It may not be the same this year.

If your manager underperformed, you should ask if it did something inconsistent with its stated philosophy or with what it said it would do. If it is following its stated strategy, and the poor returns are a style issue, you must wait the cycle out, he says.

Get the right time period

To evaluate your fund's performance, you must consider the returns over an appropriate period.

An income fund should be measured over a period of between one and three years, depending on the fund, but a local equity fund should be measured only over a five-year period, Köhler says.

Funds with exposure to global equities should typically be measured over seven years or more because of the effect of the rand exchange rate, Baynham says.

Beyond this, protracted periods of poor performance should be questioned and viewed in light of market returns.

Currently, for example, most local equity and balanced fund managers have delivered poor returns relative to their long-term targets over the past five years.

But Baynham says even the best poker player can be dealt one bad hand after another. Local asset classes have delivered poor returns. The only way these funds could have delivered more than 5% above inflation over the past five years would have been to be heavily invested offshore, she says.

Balanced funds that comply with regulation 28 of the Pension Funds Act are unable to invest more than 30% of the fund offshore and local equity funds must invest at least 70% of their assets in local asset classes.

Stock-picking mistakes

If your manager picks some shares that are a drag on its performance, don't be too quick to judge. Köhler says if a manager's stock-picking success rate is above 53%, it is doing very well.

Jugmohan says a manager that gets 60% right will be in the top 5% of all managers in its category over the longer term.

Managers try to mitigate their mistakes by increasing their exposure to shares in which they have high conviction and decreasing exposure to those they do not like that much.

Unless you obviously have a manager who has performed poorly over a long period, which is shedding key staff, hugging the benchmark or drifting between styles, the way to deal with underperformance is to diversify across managers that perform differently at different times, Köhler says.

He says if you want a fund to complement one like the Orbis Global Equity, choose one with a growth or quality style such as Investec's Global Franchise Fund, Sanlam's Global High Quality or Fundsmith's Global Equity Fund. A fund with a "core" strategy like the Old Mutual Global Equity Fund would also be good, he says.