Don’t play losers’ game

NO-NO: YOU CAN’T PICK FUTURE WINNERS BASED ON CURRENT ONES

Don’t chase top-performing active managers as keeping the lead is very hard.

South African equities haven’t been the greatest place to be over the last 10 years. To the end of September, the FTSE/JSE All Share Index delivered an annualised total return of around 11.5% for the past decade – well below its long-term average of about 14%.

That’s the return you would have seen if you invested in an index-tracker. If you’d picked a top-performing active manager, you could have done much better.

In fact, the three top performers all delivered performances more in line with what investors would expect from equities (see table). This shows that active management has been able to deliver the “alpha” everyone’s after – a return above what’s available just from the market.

However, it’s really only great news for a very small number of investors. Association for Savings and Investment SA statistics reveal these three funds were all minor players 10 years ago, representing 0.55% of assets under management in this category at end September 2008.

Lack of persistence

If financial advisors and investors were any good at picking top-performing funds, you’d expect these numbers to be much higher. As the vast majority of money wasn’t and isn’t in these funds it’s fairly compelling evidence they weren’t identified as the past decade’s winners beforehand. If you put your money into them now, there’s no guarantee you’ll be rewarded in future. S&P Dow Jones Indices analysis shows it’s very difficult for active managers to maintain top performance.

Focus on the right things

A further complication is that SA investors now have far more funds to choose from. In 2008, there were 202 domestic equity funds. Today, there are over 300. Many are small, new funds and there’s little on which to judge their future performance.

Note, at end September 2008 the Aylett Equity Fund was a tiny fund, barely two years old. Anybody invested at that point did so based on a very limited track record. Could anyone be completely confident then that it would outperform over the next 10 years?

The lesson is that you, and your financial advisor, should stop trying to pick future top-performers. It’s futile. Instead of worrying about how funds perform relative to each other, it’s far more important to be certain that what your fund manager is doing makes sense to you.

Do you understand their philosophy? Does their stock selection make sense? Do you appreciate under what conditions they might outperform or underperform? Do they give you confidence that they’ll help you reach your investment goals? Top performers come and go so trying to chase them will always result in you selling low, buying high and destroying wealth. If you find a fund manager whose views align with yours and with whom you’re willing to go on a long-term journey, your outcomes will be better.