The na­ture of long-term in­vest­ing

Corona­tion’s chief in­vest­ment of­fi­cer, Karl Lein­berger, dis­cusses var­i­ous is­sues re­lat­ing to the house’s in­vest­ment ap­proach.

Finweek English Edition - - FUND FOCUS -

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.

Karl Lein­berger

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