Be the right kind of client
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.