Be the right kind of client

Finweek English Edition - - COLLECTIVE INSIGHT - BY DEL­PHINE GOVEN­DER Del­phine is founder and Chief In­vest­ment Of­fi­cer at Per­petua In­vest­ment Man­agers. She has 16 years’ ex­pe­ri­ence in the in­vest­ment man­age­ment field, the ma­jor­ity of which was gained at Al­lan Gray Limited where she held the po­si­tion of p

The best in­vest­ments are bought, not sold. In the pur­suit of un­cov­er­ing which char­ac­ter­is­tics most em­body a su­pe­rior as­set man­ager, an ex­pert fi­nan­cial ad­viser or con­sul­tant, or a solid trustee, one of the most over­looked though most crit­i­cal play­ers of all in the in­vest­ing ecosys­tem is in­deed the client (you). In­creas­ing the aware­ness of a client about the sig­nif­i­cance of his/her at­ti­tude and ac­tions is vi­tal in the in­vest­ing jour­ney. As an im­por­tant start­ing point, hav­ing clar­ity of one’s in­vest­ment ob­jec­tive as a client; com­mu­ni­cat­ing that ob­jec­tive and then be­hav­ing in ac­cor­dance with that ob­jec­tive are of­ten eas­ily over­looked but are fun­da­men­tal in­gre­di­ents for suc­cess­ful in­vest­ing out­comes.

Whether walk­ing though air­ports, watch­ing TV or on­line, South Africans are presently ex­pe­ri­enc­ing a tor­rent of im­pres­sive in­vest­ment mar­ket­ing cam­paigns, catchy by-lines and im­pas­sioned in­vest­ment claims. Even for ex­pe­ri­enced in­vestors it is hard to not be dis­tracted, let alone to re­main firmly com­mit­ted. While in­vest­ment firm ad­ver­tis­ing should re­ally aim to con­vey the ethos of the firm or its in­vest­ing DNA, the line is fine be­tween brand build­ing, over­promis­ing and out­right sell­ing. Un­like other fi­nan­cial ser­vices prod­ucts in­vest­ment prod­ucts by their na­ture should be bought by, rather than sold to, the in­vestor. When in­vest­ments are bought and not sold, in­vestor be­hav­iour is likely to be less at odds with his/her un­der­ly­ing needs.

IF IT AIN’T BROKE, DON’T FIX IT

Un­der­per­for­mance alone is not the rea­son for a client to change in­vest­ment man­agers. A pe­riod of un­der­per­for­mance may arise from, in­ter alia: 1. Mar­ket con­di­tions that do not favour a spe­cific in­vest­ment style. 2. The man­ager mak­ing a dis­pro­por­tion­ate num­ber of in­vest­ing mis­takes. 3. Style drift as the man­ager (con­sciously or not) changes their in­vest­ment ap­proach to mit­i­gate the busi­ness risks. These risks – usu­ally that of clients leav­ing – can iron­i­cally lead a man­ager to shift their in­vest­ment ap­proach or at worst ca­pit­u­late com­pletely and by do­ing so, trap greater un­der­per­for­mance in the process. The con­se­quences of this can be dis­as­trous for the in­vest­ment firm and the whip­sawed client usu­ally leaves any­way. How a client be­haves in re­sponse to the above can sig­nif­i­cantly im­pact the in­vest­ment out­come. For ex­am­ple, if a client con­sciously un­der­stands and ‘ buys’ the man­ager/firm/prod­uct and the man­ager re­mains com­mit­ted to this strat­egy, ad­verse mar­ket con­di­tions should not be a rea­son to change man­agers. How­ever, signs of cause 2 or 3 are clear warn­ing f lags. A rise in the num­ber of in­vest­ing mis­takes typ­i­cally war­rants fur­ther in­ves­ti­ga­tion as to whether there are struc­tural changes in a f irm that are caus­ing these er­rors. Cause 3 is a con­tentious one for client and man­ager. A client is jus­ti­fi­ably con­cerned when he/she is in­ad­e­quately pre­pared for the pos­si­bil­ity of pro­longed un­der­per­for­mance; and if this poor per­for­mance is not con­fi­dently ex­plained then the man­ager’s cred­i­bil­ity is brought into ques­tion. The client should con­sider whether the man­ager is still fun­da­men­tally pro­vid­ing the prod­uct ini­tially pro­posed.

Un­der­per­for­mance should not be a time for a knee­jerk client re­sponse. Dis­in­vest­ing from a man­ager af­ter a pe­riod of un­der­per­for­mance could ar­guably be as im­por­tant a de­ci­sion as mak­ing the ini­tial de­ci­sion to in­vest. If the man­ager is in­trin­si­cally the same one you hired and has the busi­ness and men­tal for­ti­tude to with­stand the un­der­per­for­mance and their in­vest­ment po­si­tions work out as ini­tially planned, the sub­se­quent out­per­for­mance could be sig­nif­i­cant – but to ex­pe­ri­ence it you need to re­main in­vested.

WHAT MAT­TERS MOST?

Many par­tic­i­pants in the in­vest­ment sphere spend a great deal of en­ergy con­sid­er­ing what in­nate qual­i­ties make a su­pe­rior in­vest­ment f irm. The con­clu­sion is typ­i­cally that a com­bi­na­tion of the in­vest­ment ap­proach and people deliver the firm’s edge. Some­times less ap­pre­ci­ated, how­ever, is that a key con­trib­u­tor is a sus­tained com­mit­ment to the cho­sen in­vest­ment ap­proach. Key en­ablers for this are both own­ers and clients who ‘ buy’ and in­ter­nalise at the out­set the cho­sen ap­proach to in­vest­ing and how it is likely to deliver re­turns (and prof­its) un­der vary­ing mar­ket con­di­tions.

Clients who firstly truly un­der­stand their own ob­jec­tives; sec­ondly, se­lect man­agers thought­fully and free from pro­pa­ganda and then thirdly, re­main com­mit­ted to their choices in the ab­sence of any in­for­ma­tion to dis­pute it other­wise, end up not only with su­pe­rior in­vest­ment out­comes but also make a more ra­tio­nal and com­mon-sense mar­ket­place.

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