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Why it’s so difficult to pick a good unit trust

And even more difficult to stick with it.

For three of the last six years, the Coronation Top 20 Fund has underperformed the FTSE/JSE Shareholder Weighted (Swix) All Share Index. In two of those periods, it delivered a negative return over a time when the market was up.

Coronation Top 20 Fund 12-month relative returns
  2013/10/01 2014/10/01 2015/10/01 2016/10/01 2017/10/01 2018/10/01
  2014/09/30 2015/09/30 2016/09/30 2017/09/30 2018/09/30 2019/09/30
FTSE/JSE Swix All Share Index 17.98% 6.07% 9.04% 7.00% 0.86% 0.19%
Coronation Top 20 Fund 9.62% 2.74% 14.94% 9.55% 3.80% 2.39%

Source: Morningstar

However, viewed over the past 15-year period, the Coronation Top 20 Fund is the best performing South African general equity unit trust. It is one of only 11 funds to have outperformed the Swix index over this time.

Coronation Top 20 Fund 15-year annualised return
  2004/10/01
  2019/09/30
FTSE/JSE Swix All Share Index 14.4%
Coronation Top 20 Fund 15.7%

Source: Morningstar

In research published last year, Morningstar found that this kind of return profile is hardly unique. In fact, Morningstar found that funds that outperform their benchmark over 15 years will underperform that benchmark for an average of nine to 12 years within that period.

Conversely, funds that underperform over a full 15 years could go through periods of outperformance of as long as 11 years during that time.

“The main implication of these findings is that standard performance-measurement periods, such as three, five, or even 10 years, are far too short to evaluate a manager with confidence,” the authors of the Morningstar study noted.

The Coronation Top 20 Fund is again a good example. Over the past decade as a whole, the fund has underperformed its own benchmark – the FTSE/JSE Capped All Share Index. Yet, longer term, it is the best equity fund in the country.

It’s not all one way

This highlights how difficult it is to identify ‘good’ funds. Most investors are under the impression that at least a five-year historical return, and certainly a 10-year historical return, is illustrative of a fund’s future prospects. However, the Morningstar study shows that this isn’t the case, because just a few extremely good years can outweigh long periods of weakness.

“Long-term outperformance is driven by a handful of periodic outsized years accompanied by relatively long periods of underperformance,” says C Thomas Howard, the CEO and chief investment officer at AthenaInvest, based in Colorado in the US.

“Investors that want to outperform in the long run need to be prepared to accept substantial periods of underperformance.”

Consider another of the best long-term performers in South Africa – the Prudential Dividend Maximiser Fund. The table below illustrates its year-by-year performance between October 2009 and September 2016:

Prudential Dividend Maximiser Fund 12-month relative returns
  2009/10/01 2010/10/01 2011/10/01 2012/10/01 2013/10/01 2014/10/01 2015/10/01
  2010/09/30 2011/09/30 2012/09/30 2013/09/30 2014/09/30 2015/09/30 2016/09/30
FTSE/JSE Swix All Share Index 21.79% 4.14% 26.96% 25.28% 17.98% 6.07% 9.04%
Prudential Dividend Maximiser Fund 18.65% 3.81% 23.48% 28.25% 16.82% 2.78% 5.97%

Source: Morningstar

For six of these seven years, it underperformed. In fact, for seven of the past 10 years, the fund has delivered a return below the benchmark. Yet over 15 years, it is the eighth best equity fund in the country.

The urge to act

The obvious challenge for investors when considering this kind of return profile is that extended periods of underperformance are deeply uncomfortable. And the longer they persist, the more likely they are to lead to investors selling out and opting for a fund that has shown recent outperformance.

As humans are naturally loss-averse, this is understandable. However, the risk is that investors then make what should be a long-term decision based on short-term information. As the Morningstar study shows, judging fund returns over even 10 years can be misleading.

Staying invested is, however, extremely difficult. This is not just because investors fear that the underperformance will continue, but because it is unsettling to feel like there is nothing you can do about it.

“Investors perceive short-term underperformance as a problem that needs to be ‘fixed’,” Howard points out. “Doing something gives them a false sense of control. They blame the manager for inevitable ups and downs and fire them, falling prey to the fallacy of control.

“Done repeatedly, this is sure a recipe for continual underperformance,” he says.

Patience

Put another way, investors struggle to accept that once they have chosen a fund manager they have handed over control of their money. Performance is therefore out of their hands.

This emphasises the importance of selecting the right fund manager in the first place.

If even 10 years of underperformance can be reversed by a few years of strong outperformance, that suggests that there is no value in trying to shift money between funds at any point based on their historical returns alone. In fact, numerous studies have proven how chasing performance destroys value for investors.

Read: This is how much your investment behaviour is costing you

The far better approach is to get your asset allocation and manager selection right from the start. Understand and be comfortable with the investment strategies that your chosen fund managers will follow, and, most important, be willing to accept that periods – and occasionally extended periods – of underperformance are inevitable.

“Active investing is a long game. It is routine for a good manager to trail an index for years,” the authors of the Morningstar study noted. “It turns out that even if you have the acumen to pick a good manager, this may be of little avail if your patience fails you.”

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COMMENTS   19

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Most people have no idea on how to invest. That’s the first problem. The 2nd problem is for decades too many brokers were selling commission based (inefficient) investments.3rd most people sit with so much debt, it is usually better off to pay the debt 1st but brokers won’t tell you that.

This i completely agree with.

Once you have settled your debt invest in an index tracking fund offered by the likes of Satrix, Sygnia etc…

What you save in fees will far outperform any active manager over the long run, Coronation doesn’t have a platform so in order to invest in its top 20 fund you will have to pay platform fees at glacier, Allan Gray and so on.

Buying a top 40 Index on Sygnia or Easy Equities will avoid that fee and leave you better off.

You don’t need a platform to invest in the Coro funds, you can invest directly. In fact you don’t a platform to invest in any funds, you can go direct.

Did you know that Sygnia has one of the most expensive platforms in SA? When they purchased the DBX funds and converted this to Sygnia funds, they placed all DBX clients on their admin platform as opposed to direct into the DBX/Sygnia solutions. SO clients have been paying an additional 1.1%….. which would not occur if they were placed directly in the solution.

My point being, everyone is pushing a narrative, and you can to do A LOT of home work to find out the true costs.

What the hell, what do you mean they do not have a platform? Am I imagining the Coronation platform then? I can link you to posts where I am pro index, so I’m not pro managed funds, but don’t make up nonsense to support your narrative.

Coro doesn’t have a LISP platform, but you can obviously access their funds by investing directly with the management company.

Really? Again propaganda to try and convince investors to stay invested (for 15 years plus). You must become your own fund manager and You need to take control. Stay for 10 years in an under performing fund? Yes, that is what fund managers and financial advisers want you to do so that they can reap the benefits of commission and fees. With discretionary funds I say switch, switch, switch. This is especially important with SA funds like the Coronation Top 20 fund. With a bit of technical knowledge it is possible to outperform equity unit trust funds by switching in and out of those exact funds. I have proven it!

Probably the worst piece of advice you will find on the internet today.

Im pretty sure, I saw some hippy advising that the toilet paper is used to clean your fingers afterwards, not be used directly on the initial wipe…

“With a bit of technical knowledge it is possible to outperform equity unit trust funds by switching in and out of those exact funds”

So not something for the average man in the street can do?

JuanCPT ….TOP20 has been a performer for me

What has not has been Orbis….5 years stuck in a cul-de-sac …where as Vanguard (covering all sectors of Orbis and more has performed really well

Will be making the “Exit” from Orbis

JuanCPT has it absolutely correct, we need to make money now, respond to a changing market and switch, do it a little at a time, rebalance every month. retirees will not be around in 20 years time!
Oh – so what about the “past performance does not guarantee future….” that the brokers punt and then use it to forecast the future.
fire your broker, set a strategy and trade a little I say

So here is a fund showing that with a little patience I can get more than satisfactory consistent benchmark beating returns, over many years, after all fees. This is true capital-defining, wealth-creating stuff. The headline should rather read: “Why it’s NOT so difficult to pick a good unit trust”. Well done, Coro – you keep the faith in active management alive.

To support you. Invested lumpsum (100k) day or two after inception of the fund (2000). Got scared in September 2008, sold of the growth in early September 2008 and started reinvesting In December 2008 on a monthly basis for 4 months and have not touched it since then (capital gains tax). Total return 2265%. Very shabby investment. Thanks Coro.

A Total (Holding Period ) return of +2265% over 19 years is equal to +18.12% p.a.

(1 + r )^ n – 1
= ( 1 + 2265%)^(1/19)-1
= +18.12% p.a.

So Coronation is the best performing SA fund over 15 years. The problem is that the outperformance is truly marginal and in many of those years it was underperforming the index.

What that then means is that timing comes into play. You need to make sure you draw your funds at the right time or miss out.

Should timing come into play?

That to me adds a lot of risk because I’m not going to time my withdrawals to be in line with the point at which the top performing fund in SA slightly outperforms the index over time.

As such, I would rather buy the index, and in the case of ETFs, I would pay lower fees as well.

“Why so difficult to pick a Unit Trust?”

Well for starters, there are some 1,265 registered local funds (and 477 foreign funds) under the Collective Investments Scheme register.

……..and that while we only have less than 400 stocks on the JSE (ignoring the number of bonds/gilts)

Hence, there are more money managers that want to offer you to manage the available 400 stocks on the Main Board (and bonds / other securities). It’s a manifestation of asset management industry earning quite well, for it to be worth it.

Spot on Michael! It is hard to pick the winning unit trusts because you are not supposed to. The industry is designed to saturate the retail market with products that can be selected from the shelf with hindsight.

“Sorry sir, it is not our mistake that you chose the wrong option. Just look at the outperformance of this other fund of ours!” The industry is designed for advisors to select the winners in hindsight.

This is poor advice, and non-sensical. It is so hard to “pick” the right unit trust because performance is unpredictable, no matter how hard you research. Hindsight is not allowed, and cherry picking of example funds is not allowed. So low-fee trackers make the most sense.

Also, he says numerous studies have shown that chasing performance leads to poor returns in the long run. Where are the studies? Provide a link please.

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