Every year, the Morningstar Awards recognise a selection of top-performing unit trusts. These awards are highly regarded by asset managers because there are a limited number of categories, and funds are ranked not just on straight performance but on their risk-adjusted returns over one, three and five years.
This means that the winning funds need to have delivered consistent returns over a reasonable time period. They must also have produced that return without exposing investors to too much risk.
“With the investor in mind, we are aware that part of the investment is the return and part of it is how you feel about the journey to get that return,” says Morningstar South Africa MD Tal Nieburg.
“If you can’t stay invested through market cycles, you will never receive that performance. So we measure a risk-adjusted return, which means that the journey is more palatable for investors.”
It’s not just the destination
One of the specific things Morningstar considers is the biggest drop that a fund has experienced over each period. This is because investors can find it difficult to stomach large losses. This is when they are most likely to lose conviction and withdraw their money.
“The methodology penalises downside deviation quite significantly,” Nieburg explains.
“The idea is to identify funds that have offered a smoother ride in terms of performance, as opposed to those that are more volatile.”
For the awards, funds are ranked relative to similar unit trusts in seven categories.
“The usefulness of comparing funds against their peers is that when investors have over 1 600 unit trusts to choose from, the good investment managers with consistent investment processes should be the ones that deliver above average over time,” says Nieburg. “But that does require looking at performance over longer, more meaningful time periods.
The bigger picture
“Over time, the better funds should be consistently above average,” he adds. “If the manager has a process that is well thought-out, repeatable and consistently applied, they should do well through different cycles.”
This also means that investors shouldn’t feel that they have to pick the ‘best’ fund in order to hand over the management of their money. They should rather make sure that they feel comfortable with a selection of managers whose philosophies they understand, and who they will be able to stick with over the long term.
“There is no one single fund that is the best fund,” says Nieburg. “These awards are done at a point in time looking back over a period in time, and that changes from year to year.
“An award is not an endorsement that this fund is going to perform in the future,” he adds.
This is best illustrated by the fact that over the past seven years no fund has won in a category for more than two years in a row.
“That shows the power of diversifying and picking a number of different managers or styles that will deliver consistently over time,” says Nieburg. “There is absolutely no one golden egg.”
The finalists for the Morningstar Awards this year are:
Best Aggressive Allocation Fund
Best Bond Fund
Best Cautious Allocation Fund
Best Flexible Allocation Fund
Select BCI Worldwide Flexible Fund (managed by Blue Alpha Investment Management)
Best Global Equity Fund
Nedgroup Investments Global Equity Fund (managed by Veritas Asset Management)
Best Moderate Allocation Fund
Best South African Equity Fund
Best Fund House: Larger fund range
Investec Asset Management
Marriott Asset Management
Sygnia Asset Management
Best Fund House: Smaller fund range
Fairtree Asset Management
Kagiso Asset Management