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No wonder investors are confused

There’s no simple way to pick a fund manager.

According to statistics from Morningstar there were 176 funds in the South Africa equity general category at the end of August. Given that there are 375 companies listed on the JSE, that means there are now almost half as many local equity funds as there are shares.

One of the benefits of unit trusts is that they are meant to make investing easier. Instead of selecting individual shares, investors can engage a professional asset manager to do that for them.

However, if there are so many funds available, choosing an asset manager is becoming almost as complicated as picking stocks. The difference in returns one can experience are also substantial.

As the table below shows, the difference in performance between the top performing general equity fund and the poorest performer over the last year is 37.28%.

SA general equity fund performance to September 10, 2018
Fund One-year return
Sygnia Divi Index Fund A 15.88%
Investec Value Fund A -21.40%

Source: Morningstar

What makes this disparity even more confusing for investors is that, on face value, both the Sygnia Divi Index Fund and the Investec Value Fund follow value-investing strategies. Ordinarily, one would expect them to perform in similar ways.

For 2014, 2015 and 2016, this was broadly the case. As the below table shows, both funds delivered market-related performance in 2014, underperformed substantially in 2015, and rebounded in 2016. However, their fortunes have diverged materially since the start of 2017.

SA general equity fund annual performance to August 31, 2018
Fund 2014 2015 2016 2017 2018
Sygnia Divi Index Fund A 8.4% -19.3% 22.6% 26.2% -1.5%
Investec Value Fund A 7.8% -12.6% 60.3% -13.0% -16.1%

Source: Morningstar

Looking at this, how does one answer the question of whether value investing is performing or not? How can the same broad philosophy deliver such different results?

Some might argue that as a passive fund tracking an index that only takes a single factor – dividend yield – into account, the Sygnia Divi Index Fund is not truly representative of value investing. That requires a manager making active decisions about where value is available in the market.

However, if one looks at the year-to-date returns for local equity funds, one runs into another anomaly. The Investec Value Fund is again the worst performer, while the Counterpoint SCI Value Fund is eighth and the SIM Value Fund is also in the top 15.

SA general equity fund performance to September 10, 2018
Fund YTD return
Counterpoint SCI Value Fund A1 3.74%
SIM Value Fund A1 3.27%
Investec Value Fund A -14.32%

Source: Morningstar

These are all funds explicitly following an active value strategy, yet producing completely different results. How does the industry explain that to the average investor?

Are they genuinely all value funds, or do they just carry the name for marketing purposes? The largest holding in the SIM Value Fund is Naspers. The fund managers might have a good argument for why they believe Naspers is a value stock, but many market watchers would raise their eyebrows at the idea that a counter trading on a price-to-earnings ratio of nearly 60 could be considered value.

This illustrates the complexity that investors are facing. Even if one narrows the universe of equity funds down to the handful that can be clearly classified as value funds, one still faces a far from simple task in choosing between them.

This is unquestionably one of the reasons why investors all over the world have been moving more and more of their money into index funds. And it’s not a reason that the active management industry seems to entirely appreciate.

Recently the head of business development at a local fund manager wrote an article in which he argued that no passive fund outperforms the index it is tracking due to the fees it has to deduct. This, he said, means that “the investment outcome is guaranteed to disappoint”.

This, however, is a misunderstanding of why passive funds have become so popular. In fact, one could argue that index trackers are guaranteed not to disappoint, since they deliver performance in line with the market.

What investors really find disappointing is the inconsistent returns from active managers. No fund manager can guarantee outperformance year after year, and none deliver it.

A market-related return is something investors can understand. They can live with why their investment is going up or down because they can see the market doing the same thing. Active managers have known this for decades, which is why many of them have run funds that are closet index trackers.

Of course good fund managers will outperform over the long term, and there are many good fund managers in South Africa. However, to beat the index you have to take positions different to the index, and that guarantees the risk of underperformance. It also guarantees an additional layer of complexity for the investor, since the reasons why a fund does well or poorly are not always explicit.

Of course passive investing is no panacea. It does come with its own risks. However, it does substantially reduce the complexity that investors have to deal with. And since active managers have been the architects of this complexity in the first place, they are now facing the consequences.

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Spot-on Patrick, especially if one considers the disproportionate fee ratio in comparison to the lackluster return-performance of most supposedly actively managed funds.

Some fund managers do not have enough experience to grow your money when the JSE is in down turn cycle.

A good fund manager should be able to interpret the markets ahead of time, have a strategy and make profit for the investors.

Some look like absolute sitting ducks with no character.

When your investment is making a loss, move it.

That is spot on Pat, for me, wife and kids ETFs all the way. Active funds are also expensive with multiple layers of feed and more…..

“Active managers have known this for decades, which is why many of them have run funds that are closet index trackers.”

The paragraph sums up nicely. Dishonest freeloaders

Thanks Patrick. An enjoyable read!

Yesterday’s article you posted (SA’ top-performing Equity funds) I don’t consider anymore as any value to one. Today’s winners will be tomorrow’s losers again, depending on which sector did the best over a given period.

One will probably will get the same returns if one choose to invest in yesterday’s loser…i.e. buy low 😉

I’ve seen this in the recent (local) property/REIT funds…a year or so ago, the returns from these funds were the darlings of SA…and a frenzy of new REIT funds were launched to satisfy demand (e.g. Liberty 2-degrees for one). Indication of a “heated” sector back then. And now?

Opposite end of the scale, global funds would naturally show out-performance to date (thanks to the ZAR depreciation the past months)…but perhaps not great timing to buy right now (ZAR at longterm weakness…wait for EM rout to easy & ZAR to recover a bit). Unless if one looks really longterm, in that case ANY time to invest global is good (despite shorterm losses of ZAR strengthening again)

Just cycles with tough predictability 😉

Simple…don’t be confused and don’t pick one – you have a far better chance doing it yourself with a little research, the variety of platforms available to you and the sheer variety of tracker funds make it a DIY preference.

Patrick do you have a template to write your articles? It is more formulaic than a John Grisham novel. Get some fund performance statistics, highlight extremes, slag off active management and hype up passive management. Oh and of course make sure to get a plug in for Sygnia and Magda.

Passive management is unsustainable and will be at the heart of the next crisis. There are now even rumours that us etfs will soon PAY investors to invest with them. Thats right negative fees! The lights are flashing red guys! Remember Ninja loans? No income no job? Yet AAA rated. Was it a great deal for the borrower. Of course it was. Was it sustainable? Of course not. Did it all come tumbling down? Of course it did.

Same goes for passive investing. If something sounds too good to be true it is too good to be true.

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