Identifying good investment managers takes time

The Morningstar Awards recognise funds with the best risk-adjusted returns over meaningful periods.
It’s about two things – the return an investment delivers, and how the investor feels about the journey to get that return. Image: Supplied

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

Kagiso Balanced Fund

Sasfin BCI Prudential Fund

Best Bond Fund

ABSA Bond Fund

Allan Gray Bond Fund

Best Cautious Allocation Fund

ABSA Inflation Beater Fund

Kagiso Stable Fund

Best Flexible Allocation Fund

Coronation Optimum Growth 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)

PSG Wealth Global Creator Fund of Funds

Best Moderate Allocation Fund

Sanlam Investment Management Managed Moderate Fund of Funds

Sasfin BCI Balanced Fund

Best South African Equity Fund

Kagiso Equity Alpha Fund

Rezco 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

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Patrick Cairns is undoubtedly the reason many come to MoneyWeb …his research is always enjoyable and easy for those to get to grips with…

However I have not seen him investigate the various excessive management fees and costs and how they are constructed or explained away by investment houses..

One would be a fool to deny these excessive costs and fees when investing actually erodes growth comparatively quickly over time when compared to passive investing..

Active Managers cherry picking indexes and re-packing into an offering for the bewildered investor to bet on..are idle for what they charge for

Active management fees have room to reduce but the fact remains unit trust fees in South Africa are compared to corresponding fees around the world and found to be average. So let me understand where you get the notion that fees in South Africa are excessive. If you are not happy with your fund manager’s fees why don’t you just switch to a cheaper option? My view is that consumer/investor preference for funds with lower-cost funds will force active managers to review and lower their fees. Isn’t that how market work with everything else? Don’t complain and be a victim take action.

All of these above inflation and alpha generating?

End of comments.

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