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 one thousand unit trusts available, notes David Crosoer, chief investment officer at PPS Investments.
Yet, close to a quarter of all unit trust assets sit in the 20 largest funds, according to Morningstar. Further to this, a third of assets are invested with just three out 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.
Crosoer said this likely reflects the important historical role that funds played as a vehicle for retirement savings (in the South African Multi Asset High Equity category), general SA equity market exposure (South African Equity General category), and an alternative to saving through a bank account.
Nevertheless, there are ASISA categories that are less constrained by pension fund regulations (e.g. the Worldwide Multi-Asset Flexible category where funds can invest up to 100% in equities or foreign markets) or the narrowness of the SA equity market (e.g. the Global Equity General category) or less constrained by record-low short-term interest rates (e.g. South African Interest Bearing Variable Term category) that are magnitudes smaller in size than the three large ASISA categories, despite them offering far more investment opportunities.
“At the same time, there are asset management companies with robust investment processes and organisational incentives closely aligned with yours, but whose brand may not be well known,” Crosoer said.
How might you incorporate these into your investment portfolio?
The investment specialist said 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? More to the point, is manager skill disproportionately distributed in just a couple of ASISA categories and management companies?”
Crosoer said that there are a range of asset managers locally to choose from with different investment philosophies, approaches and styles, and investors will need to understand how these managers will behave in different market cycles.
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, said Crosoer.
Typically, one needs an in-depth understanding of each manager to identify how easily its investment edge is transferable across multiple categories, and where its investment skills lie.
When considering managers with less established track records, qualitative judgement becomes even more important, while the sustainability of the business should also be an important consideration, he said.
“Start out by trying to select managers that you think are above average over time. While the past is not necessarily an indication of the future, it can establish whether the managers have previously demonstrated they might have 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.”
Avoid too much focus on recent short-term performance (or performance that happened a long time ago), but also consider why the fund might have an enduring edge, said Crosoer.
“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.”
PPS Investments said that access to different investment styles to build a sensibly diversified portfolio, without you having to expend resources to do this, is key.
“We blend an appropriate combination of investment styles and asset classes. These are best suited to take advantage of opportunities at different times in the cycle, thereby offering optimal diversification in your portfolio.”
Crosoer said there is no magic number of how many funds to include in an investment portfolio, but most investors are probably under-exploiting the asset manager skillset that could be accessed in a portfolio, especially given how concentrated in relatively few strategies and funds investor assets are today.
“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.
“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 line-up of managers.”