The nature of long-term investing
Coronation’s chief investment officer, Karl Leinberger, discusses various issues relating to the house’s investment approach.
the defining feature of Coronation’s investment philosophy is its commitment to long-term investing. This has been consistently emphasised by the manager over many years, regardless of whether recent performance has been good or bad.
The house’s underlying case is that longterm investing presents the only enduring competitive advantage that exists in financial markets. Most investors adopt a shorter time horizon, creating opportunities for those that have the ability to remain patient and disciplined. It may be a cliché, but it truly is time in the market − not timing the market − that counts. The evidence is overwhelming, Coronation points out, that investors who are not prepared to make the required commitment capture only a small fraction of available returns over time.
We spoke to chief investment officer, Karl Leinberger, about these and related issues:
Coronation’s investment approach has received some criticism in recent years. Is the criticism justified?
Although I think that one always stands to learn more from criticism than compliments, I do think that we have always been consistent in our approach. After six consecutive years of outperforming the markets and most of our peers, we had two tough years in 2014 and 2015. However, relative performance recovered strongly in 2016, partly because long-held positions in commodity and emerging-market shares performed well despite the expectations of many observers.
Tough years are to be expected. We have built a compelling track record over the past two decades. The Coronation Equity Fund outperformed the total return available from the JSE over this period by 60% after fees (see graph). However, when you truncate the evaluation period, we have underperformed the market over a 12-month period in one year out of every three years.
The key message is that you don’t get anything for free. There can be very miserable periods in which your clients feel that you’ve really lost it. That’s the nature of long-term investing. Probably that we manage money very differently to most other fund managers. In our view 95% of money around the world is managed with a very short time horizon. Most people put portfolios together that they think will perform best this year.
In contrast, we’re obsessed with successful long-term investing. That makes sense to us intuitively. We manage primarily retirement money, where the horizon is measured in decades, not years. When you have a long time horizon, it makes no sense to judge performance over only part of the investment cycle.
One might even add that success over the long term is more demanding than success over the short term. Over the past three years, 38% of general equity unit trusts beat the market. Over 20 years, the figure is only 14%.
The reward for risk was poor in the recent past. How should investors cope with a lower return environment?
The knee-jerk response to lower returns is often to cut fees by hiring cheaper managers or switching to passive funds, to cut exposure to risk assets, to shorten your time horizon, or to take some or other drastic action.
In my opinion, these are precisely the wrong reactions in genuinely challenging times. Certain myths need to be debunked.
The first is to remember that in a high-return environment, alpha is a nice-to-have. In a lowreturn environment it becomes a must-have. Good investment managers generally do better in the latter, and investors should recognise Chief investment officer at Coronation Fund Managers that skill becomes more valuable in challenging times, not less.
Second, don’t panic. It makes more sense to lengthen your time horizon after a tough period than to shorten it. Lower past returns increase the probability of higher future returns.
Third, ensure that you invest with a manager that applies a cogent long-term philosophy that will deliver over time; maintain appropriate growth exposure; identify the long-term winning managers and asset classes; back them for the long-term; and don’t lose faith.
How importantly do you rate active asset allocation?
Asset allocation is the most important decision you make in investments. It dwarfs what any fund manager can achieve purely from security selection. The value-add from active asset allocation becomes more important, not less, during tough times.
Investors typically invest after returns have been good (and prices are by definition high), and then sell out after returns have been bad (and prices are lower). Good asset allocation requires you to do the opposite. You tend to achieve better results when you sell after a period of above-average returns as prices have gone up, and buy after a period of below-average returns and prices have fallen.
The majority of investors are better off investing in a multi-asset fund offered by a skilled manager with a strong track record in asset allocation. By giving your manager a bigger toolbox with which to create value, you can achieve a much better return at reduced levels of risk.