Questions around Allan Gray’s new benchmark

The arguments for and against using a category average.

CAPE TOWN – In December last year Allan Gray proposed four changes to its equity fund. It wanted to allow the fund to invest in offshore equities, change the fund’s benchmark, change the fund’s fee structure, and allow the use of derivatives.

Clients were asked to vote on the changes, and ultimately, more than 99% of those who sent in their ballots were in favour. This overwhelming support would suggest that the changes were uncontroversial, but the change in benchmark is beginning to raise questions.

Benchmark composition

The new benchmark for the Allan Gray Equity Fund, which is calculated independently by Morningstar, is a weighted performance average of general equity funds. Allan Gray’s two funds are removed from the calculation, and the remaining funds are then weighted according to size.

The primary motivation for the change was that the fund’s previous benchmark – the FTSE/JSE All Share Index (Alsi) – only covered local shares and would therefore be less appropriate if the fund could invest offshore. Since many other local equity funds already invest a portion of their assets in international markets, Allan Gray argued that a sector average would be a better standard.

Allan Gray is not the only fund house to use a category average, but it isn’t a popular approach. A survey conducted in 2014 showed that Prudential and Oasis were the only equity fund managers at that stage who charged a performance fee on such a benchmark. Most managers charging performance fees use either the Alsi or the FTSE/JSE Shareholder’s Weighted Index (Swix).

This is an important distinction because if a manager is going to charge a performance fee, what standard should they have to reach to earn it? Is beating other managers deserving of reward, or should a fund have to beat the market?

Given their chosen benchmarks, the vast majority of equity managers obviously feel that performance fees should be based on beating the market. It could be argued that this intuitively also makes more sense, as that is what you are paying an active manager to do.

But what of Allan Gray’s argument that the Alsi is no longer representative of their investment universe since the fund can now invest offshore? The counter-argument to that is that a category average doesn’t represent the fund’s investment universe either.

The Allan Gray Equity Fund does not invest in other funds, it invests in listed equities. Should its benchmark not therefore be based on what equity markets are doing rather than what other managers are doing?

The question is really whether this benchmark aligns with a client’s objectives. Head of retail product development at Allan Gray, Richard Carter, argues that it does:

“We went for this benchmark because that is the investor’s alternative – they could invest in other equity funds on offer,” he explains. “We are trying for our after fee return to beat their after fee return which is what an investor is looking for.”

The concern, however, is that the benchmark is not measuring the best competition. It is measuring the average manager, and it is open to debate whether the average manager sets much of a standard.

Figures provided by Allan Gray itself show that the weighted average of general equity managers has noticeably underperformed the Alsi over the last ten years. There have been times when the average has out-performed the index, but those periods do not match the stretches of under-performance.

The below chart shows the relative performance of the historical weighted average against the Alsi over the last ten years, with the Alsi return set constantly at 100. Where the line moves upwards, that indicates where the benchmark net of fees out-performed the Alsi gross of fees.


Source: Allan Gray

Allan Gray also told Moneyweb that: “When retrospectively comparing the benchmark to the Alsi, one also needs to keep in mind that a greater number of funds in the sector have started using the sector’s allowance to invest offshore. We believe that this trend will continue and that moving forward the weighted average manager will be able to outperform the Alsi by investing offshore.”

There is however no way of knowing that this assumption is true, and historical data doesn’t support it. Local equity funds have been allowed to invest offshore for some time, and offshore returns have been outstanding for the last five years, yet the category average has under-performed the Alsi over that period.

Allan Gray also suggests that a benchmark made up of other equity funds represents the simplest alternative.

“You could spread yourself across a handful of managers and achieve our benchmark,” Carter says. “You can’t, however, literally invest in the All Share. It’s much easier to spread your money across fund managers than to hold all the shares in the index in proportion to their market cap weightings.”

Even index tracking funds, he argued, do not invest exactly in the index they are tracking.

However, it is not really that simple to invest in the Allan Gray benchmark. Its largest constituent currently is the Coronation Top 20 Fund at 9.6%. The next largest fund weightings are 7.1%, 6.1%, 5.4%, 5.1% and 3.3%. Even if you invested in all six of those funds, you’re still only at 33.3% of the total.

You would have to invest in 11 different funds just to make up half of the benchmark, but even then you would be excluding most of the top performing boutiques. In that set of 11 you would only have one of the top ten performing general equity funds of the last five years.

Also, even though index funds don’t invest exactly in an index, they do offer good approximations. Investing in a single index tracker is also far easier, and cheaper, than investing in a collection of active funds.

The final question is whether an “investable alternative” for an equity fund should only be something that a client could invest in, or whether it should also represent the opportunity set for the fund manager. In other words, should it be a market standard that compares a fund manager’s performance to a reasonable alternative portfolio?

That is a standard that is transparent, visible, understandable and generally prominent in an investor’s mind. It is certainly worth asking whether a category average is equally suitable.



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At last someone noticed Allan Gray’s deception.
I voted against these changes. I am currently switching my investments away from them as fast as the CGT implications allow.

They have been using a category average benchmark for their Balanced fund since inception, so they are experts at exploiting inappropriate benchmarks. I only noticed a few years ago, but fool me twice, shame on me.

Another problem is that they compare their performance gross of fees with the cat. ave. net of costs to calculate the performance fee. This results in them earning a performance fee even if their performance is below average-on 20% of the sector average management fee.

I hope the passive industry kills you AG – ironically you have turned into the very thing that allowed you to grow to where you are today. Liberty et al’s disgusting exploitation of ignorant investors created the space for you to grow, now you are as bad as them.

I believe the whole issue of benchmarking is an unintended consequence of the fund manager determining subtle ways of raking in fees and bonuses. In fact if the managers introduced robotic trading they would exceed their benchmarks every time because they set the bar so low. One has to question whether there are any astute fund managers whose primary goal is to get the very best performance for their investors. They muddy the water with % to be invested at all times, risk (yet they define the risk on their fact sheet), seldom if ever attend AGM’s of companies they are invested in, and have every excuse under the sun why they failed to meet or beat their own benchmarks. I can never understand why a competent retail investor in the market can generally beat the ALSI yet these career fund manager always experience great difficult beating the ALSI. In fact some fund managers performances are so poor that it makes sense to stick your money and a bank FD and get a better return

Agree – Fund Managers getting greedy. And i wonder what side effects that could have on the honesty and integrity of making ethical and correct investments? I am always sceptical of Fund Managers who have the power to invest with a friendly potential partner, even if the investment is not the best to make. I may be wrong, but if Coronation take .5% of total book and invest with friend A’s business – could be the boost that business needs. OR am I just too sceptical?

“You could spread yourself across a handful of managers and achieve our benchmark,”

I hope that no one does this, especially in the same category of fund. People try to justify this using the “manager diversification” argument, whereas in reality you’re just getting an expensive market fund. The funds’ active bets cancel out to a large extent and you end up holding the market benchmark while still paying active management fees. In this case you’re better off holding a passive tracker, at a cheaper cost.

If you think a manager (or two) has skill to generate alpha, stick with them.

The only reason 99% voted in favor of the changes, was because AG bulked all of the four changes into one vote. There would have been a lot more negative votes if you split the changes into 4 separate votes.

For ease of simplicity all the above refers to the Allan Gray Equity fund.

The AG (Allan Gray) Equity fund also now has performance fees whereas previously none were levied…. Many of their industry peers don’t levy performance on their equity funds.

AG been punting that local equity returns have been at unsustainable levels yet they increase their fee base, surely you should decrease your fee base to assist and help preserve the capital of your clients when you expect returns to be lower.

AG’s performance fee measurement period on their Equity fund is DAILY with the ultimate effect that even short periods of over performance AG pockets the money before the market might return to sanity and the investor(their client) left out of pocket.

AG further has no High Watermark on their Equity fund – a basic requirement of a fair Performance fee which their fee arrangement is not.

You will notice that if you track their TER (Total Expense Ratio) over time, it has never been higher and even though they under perform their benchmark more frequently these days it’s at a higher ‘profit’ and this trend is likely (read as assured) to continue.

Their fee hurdle rate is benchmark MINUS 5%. Talk about an uninspiring hurdle to the detriment of their investors. At least set the hurdle rate at benchmark or PLUS 5%.

AG thought nobody was looking….or perhaps don’t care?

You Cannot Fool All the People All the Time, your business and reputation was built up over time why gamble like this for short term profit taking…poor performance AG!

There’s a fairly simple solution, don’t invest in funds that have performance fees, they only benefit the manager, not the investor!

Unfortunately I couldn’t vote due to not having anything in the fund at the time. I certainly would have voted against the changes. I can’t believe that the vote was so highly successful. It shows how little people actually know about benchmarks and fees.
I will never ever invest in a fund that charges a performance fee against a peer benchmark. Its archaic. Most funds internationally moved away from the practice years ago – and now AG is moving towards it. Such backwards thinking.

“more than 99% of those who sent in their ballots were in favour.”

The question is rather what % of eligible investors sent in their ballots?

The weighted performance average of general equity funds almost always UNDERPERFORMS the FTSE/JSE all share index. This is because 80% of fund managers underperform their index. In fact figures till June 2015 indicate that over various periods of 3 to 25 years , the Alsi has ALWAYS outperformed Allan Gray’s new benchmark.

A lot of you mention tracker funds as the alternative… Then use that as the benchmark. Oh wait, the Satrix Alsi only started in Jan 2013 and has already underperformed the ALSI by 1.3% per annum.

I agree that AG should not have a 20% sharing ratio UNCAPPED from a benchmark -5%, because that is a total rip off, but tracker funds aren’t necessarily the answer. And not everyone’s performance fees are that ridiculous.

Just to reiterate, the ALSI is an index – not a benchmark! It is not investable. You can compare fund managers to certain indexes, but if you do then you should at the very least mention the performance of the tracker fund of that index for a true comparison.

It is a well established international practice for funds to use appropriate indexes as benchmarks, not tracker funds. Investors are well aware that these indexes do not have expense ratios. The fund manager should beat the index before they can charge performance fees.

Agreed and the Returns should be compared to Benchmark AFTER all fees apart from the Performance Fee being calculated

Could it be game over for Allan Gray? Too big? High fees? Poor performance? Inflexible strategy? It might be time to switch to another fund manager or certainly look at index tracker etf. Even Warren Buffett has been telling us all to move to trackers for a long time. businesses have cycles so too Fund Managers so time to move on methinks.

No response from AG, or any other manager charging performance fees, yet?….just a deafening silence…

Lest we not forget Allan Gray Equity fund charges performance fees regardless if overall performance is negative or positive. The hurdle is MINUS 5% so assuming Average Equity Fund does -5% LESS 5% Hurdle the fund only has to beat -10% for performance fees to kick in!!!!!!!!!!!!!!!I don’t want to be a client of AG, shocking!

Not for nothing is Allan Gray himself one of the richest men in Africa so the media say. Those fees are simply massive whatever the performance.

End of comments.




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