Slow, steady and sure

It is quite common for a company which has had a relatively poor year to make speeches or write advertorials about long-term investing. Coronation, ever the marketing machine, is pushing this line aggressively. Prudential, which didn’t meet its exacting standards, has produced a more subtle article in its internal newsletter on the need to “consider the longer journey through time”.

Most of us don’t have the luxury of keeping our jobs if we stuff up as royally as some fund managers did last year. But it is worth looking at Valdon Theron’s article.

He has the thankless task of keeping the consultants happy, and he has got Prudential onto most lists, though it doesn’t yet have the popularity of the big three: Allan Gray, Coronation and Investec.

It’s true that past performance doesn’t always repeat, but there is no doubt that bad performance persists far more than good; we all know those managers that seem to be destined to stay in the fourth quartile.

But Prudential isn’t one of them. What is important is to work out how performance was derived — was its good performance at the start or end of the period? Naively, many of us hope our consultants or financial advisers do this kind of work on our behalf. I suspect most do it very superficially.

A high cash holding at the start of the global financial crisis will make a manager look clever, yet it might have held a big weighting for purely logistical reasons: to pay an outflow, for example. Theron urges a focus on rolling returns looking at, say, the series of one-year returns in a monthly sequence.

He concedes that past performance does matter, as it indicates how funds

“behave” in different market conditions. Prudential has outperformed the index in a range of different market conditions, but steadily, without absurdly over- or undershooting. It is not a highheartbeat manager, but all its clients should know that.

Its annual outperformance of 1.7% might seem small, but compounded over 20 years it is significant. Prudential has very rarely been 2% or more below the index in any given rolling one year, no more than four times. It has only underperformed the index over three years in three out of 85 rolling periods. It has not underperformed over five years in its Core Equity fund. Theron says the approach is to put singles on the board rather aim for high-risk sixes.

A strong position

It is in the nature of the manager to take this approach. Its institutional products, Core Equity and the marginally racier Select Equity, are one and two in the Alexander Forbes benchmark cognisant category over 10 years. They have both outperformed their benchmarks over the past five years, except for 2014.

It is also quite impressive that Prudential in its segregated balanced funds has the lowest dispersion of returns — clients know their returns will be within five basis points (0.05%) of other clients with the same mandate. At the other end of the spectrum is Oasis, which has a dispersion of 1.02%. The second worst is Allan Gray at 0.54%, third is Foord at 0.43%.

Prudential will maintain a strong position in the balanced fund market, as so few firms have proved they have the capacity to manage it. The equity space is much more crowded and there is pressure to switch funds to blackowned managers. But for many pension funds, awarding specific sector mandates adds complexity.

Trustees and even consultants are not qualified to manage the asset allocation process, and rely on big houses to make changes when needed.

A high cash holding at the start of the global financial crisis will make a manager look clever