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HOW do you judge and select a fund manager? Quite a lot has been written on this topic and I don’t want to add more.
The big problem in the investment industry is that distribution is incentivised to sell product.
Ideally, you want investors to buy investment products like they buy bread or milk. You go to the shop when you need it. Imagine if you had five types of bread and the assistants were incentivised on how many loaves, or which loaves were sold.
Secondly, the industry is complex and there is an incredible amount of rubbish spouted about what is a good investment.
Joe Public doesn’t have the knowledge to decide what product or which fund is best suited for him/her. To complicate matters, there is a long time gap between making the decision and being able to judge if it was the correct one - often five to 10 years.
The industry is populated by many slick salespeople, well paid because they speak and present well and are also paid to dress well. The important point is to check the track record.
That will give you a clue about the suitability of the product. But even for that, you need to measure over periods long enough to eradicate the role of luck or randomness (eg anyone who happened to start a new fund on January 1 2009 looks brilliant).
For Joe Public, the simpler the product and the lower the costs (especially upfront commission) the better. In the same breath, I must slip in here that I don’t understand investors who don’t want to pay performance fees.
At least you know you only pay when you’ve received good returns.
The bottom line is, do enough homework to ensure you know what you want, and then select a fund manager who has a long track record of following a process that delivers that consistently.
Based then on our Best Ideas track record, it would seem you shouldn’t invest with us.
The eight-year track record of our Best Ideas fund is good, but our three- and five-year numbers don’t look so good. I would like to show why basing investment decisions (whether it be stocks or funds) solely on the performance over the past three or five years is dangerous.
Reason 1: Why?
The unit price of the Global Best Ideas was at an all-time high in January 2008, while January 2009 was the low point. After being down 58% in 2008, from January 2009 the fund generated returns (net of fees) of 78%, 14%, -22%, 20% and the tea leaves indicate that 2013 should be positive, but let’s assume 15% or 0%.
You can see what a tremendous difference 2008 makes.
Measured from January 2008 the fund looks bad, but measured from January 2009, the probability is high that Best Ideas will win a Raging Bull award for its five-year performance (to December 2013).
But it’s the same fund manager, the same philosophy, the same (okay, improved) process and with a significantly more experienced team.
The table above shows the effect of that one year. The year 2008 was exceptional and distorts the numbers; it also highlights how dangerous it is to select/reject a fund simply on the five-year number.
Reason 2: Mandate
The six-year period ending December 2013 captures the “mandate effect”. Funds with an “equity only mandate” (and especially a fully invested, bottom-up, stock picking mandate) were hard hit in 2008 as markets crashed.
Hence a balanced fund with a high percentage of cash will have outperformed in 2008, but will have done poorly in 2009 (when markets rebounded). So in that regard, one must ensure one is comparing apples with apples.
Be careful not to compare a balanced fund with an equity only fund in a period that includes a bear market.
Finally, the team
Fund managers cannot manage a fund on their own; definitely not a global fund.
So the larger a team or fund management business, the more important people management becomes. In that regard, managing a fund management unit is like managing a football team.
To outperform and keep winning, you need to have an above average team. Do you go the Manchester City route (ie pay top dollar and buy expensive players) or the Manchester United route (ie grow players via the “youth” academy, combined with occasionally buying a star).
Whichever route you follow, the challenge is to keep a group of highly talented people motivated and working together.
In that regard, I’ve learnt a lot studying Alex Ferguson who is remarkable in continuously finding new talent, but then also weaning/selling players that don’t have it or lose their willingness to play their heart out or cause problems in the dressing room.
The biggest challenge is when your stars become individualistic.
As with Sir Alex, if you are consistent in applying your processes, the results follow.
The balance of both consistency and experience is vital. It is no coincidence that both Buffett and Ferguson are in their 70's (in fact, Warren is 83).
For you, it is important to know that our team has decided winning a five-year Raging Bull in 2013 won’t mean much due to the base and mandate effect.
The Raging Bull we would want to win is for the five years to 2016. That will measure the current team from the normalised base of January 2012.
Our DNA is to communicate regularly and be totally transparent. In the end, it is vital that you trust us as you do your doctor.
- Fin24
*Kokkie Kooyman, head of Sanlam Investment Management Global, has won the Best Global Financial Fund Manager award for the last three consecutive years.
The big problem in the investment industry is that distribution is incentivised to sell product.
Ideally, you want investors to buy investment products like they buy bread or milk. You go to the shop when you need it. Imagine if you had five types of bread and the assistants were incentivised on how many loaves, or which loaves were sold.
Secondly, the industry is complex and there is an incredible amount of rubbish spouted about what is a good investment.
Joe Public doesn’t have the knowledge to decide what product or which fund is best suited for him/her. To complicate matters, there is a long time gap between making the decision and being able to judge if it was the correct one - often five to 10 years.
The industry is populated by many slick salespeople, well paid because they speak and present well and are also paid to dress well. The important point is to check the track record.
That will give you a clue about the suitability of the product. But even for that, you need to measure over periods long enough to eradicate the role of luck or randomness (eg anyone who happened to start a new fund on January 1 2009 looks brilliant).
For Joe Public, the simpler the product and the lower the costs (especially upfront commission) the better. In the same breath, I must slip in here that I don’t understand investors who don’t want to pay performance fees.
At least you know you only pay when you’ve received good returns.
The bottom line is, do enough homework to ensure you know what you want, and then select a fund manager who has a long track record of following a process that delivers that consistently.
Based then on our Best Ideas track record, it would seem you shouldn’t invest with us.
The eight-year track record of our Best Ideas fund is good, but our three- and five-year numbers don’t look so good. I would like to show why basing investment decisions (whether it be stocks or funds) solely on the performance over the past three or five years is dangerous.
Reason 1: Why?
The unit price of the Global Best Ideas was at an all-time high in January 2008, while January 2009 was the low point. After being down 58% in 2008, from January 2009 the fund generated returns (net of fees) of 78%, 14%, -22%, 20% and the tea leaves indicate that 2013 should be positive, but let’s assume 15% or 0%.
You can see what a tremendous difference 2008 makes.
Measured from January 2008 the fund looks bad, but measured from January 2009, the probability is high that Best Ideas will win a Raging Bull award for its five-year performance (to December 2013).
But it’s the same fund manager, the same philosophy, the same (okay, improved) process and with a significantly more experienced team.
The table above shows the effect of that one year. The year 2008 was exceptional and distorts the numbers; it also highlights how dangerous it is to select/reject a fund simply on the five-year number.
Reason 2: Mandate
The six-year period ending December 2013 captures the “mandate effect”. Funds with an “equity only mandate” (and especially a fully invested, bottom-up, stock picking mandate) were hard hit in 2008 as markets crashed.
Hence a balanced fund with a high percentage of cash will have outperformed in 2008, but will have done poorly in 2009 (when markets rebounded). So in that regard, one must ensure one is comparing apples with apples.
Be careful not to compare a balanced fund with an equity only fund in a period that includes a bear market.
Finally, the team
Fund managers cannot manage a fund on their own; definitely not a global fund.
So the larger a team or fund management business, the more important people management becomes. In that regard, managing a fund management unit is like managing a football team.
To outperform and keep winning, you need to have an above average team. Do you go the Manchester City route (ie pay top dollar and buy expensive players) or the Manchester United route (ie grow players via the “youth” academy, combined with occasionally buying a star).
Whichever route you follow, the challenge is to keep a group of highly talented people motivated and working together.
In that regard, I’ve learnt a lot studying Alex Ferguson who is remarkable in continuously finding new talent, but then also weaning/selling players that don’t have it or lose their willingness to play their heart out or cause problems in the dressing room.
The biggest challenge is when your stars become individualistic.
As with Sir Alex, if you are consistent in applying your processes, the results follow.
The balance of both consistency and experience is vital. It is no coincidence that both Buffett and Ferguson are in their 70's (in fact, Warren is 83).
For you, it is important to know that our team has decided winning a five-year Raging Bull in 2013 won’t mean much due to the base and mandate effect.
The Raging Bull we would want to win is for the five years to 2016. That will measure the current team from the normalised base of January 2012.
Our DNA is to communicate regularly and be totally transparent. In the end, it is vital that you trust us as you do your doctor.
- Fin24
*Kokkie Kooyman, head of Sanlam Investment Management Global, has won the Best Global Financial Fund Manager award for the last three consecutive years.
