The good fund manager is not always the one in the clown suit
• Huge demand for research from advisers who lack the time to sift through 1,700 unit trusts
At conferences it is sometimes the most low-key presentations that make the greatest impact. At the Allan Gray investment conference in Sandton, Rory Maguire from unit trust researcher Fundhouse reminded the audience of the basics of choosing a good manager. Some might have expected to see Tom Cruise’s alter ego Jerry Maguire, but it isn’t Rory’s style to shout “Show me the money!”
He repeated the point made famous by the great Fidelity stockpicker Peter Lynch, that when there is a 50%-off sale at Pick n Pay, consumers are knocking down the doors at 7am. Yet in investment it is the opposite. In effect we go to Pick n Pay and ask what item has gone up most in the past year and stock up on that.
Maguire used to be in marketing at Investec but he retired his clown suit to go into unit trust research, where there undoubtedly was a gap. And he timed this with the rise of discretionary fund managers. There is now huge demand from financial advisers who don’t have the time to sift through 1,700 unit trusts. But there is plenty of research to prove it makes sense to buy a fund and keep it in a bottom drawer.
Chopping and changing destroys value, especially if it means investing with the winners of the Raging Bull Awards: their success is often a contraindicator for the next five years. It is a well-established fact that investors in unit trusts only enjoy about half of the return of the funds themselves as the timing of their exits and entries is so poor — and this applies equally to investors who use intermediaries as it does to direct clients.
Maguire talks somewhat idealistically about a moral code for fund managers to put the client first, to ensure they have a dignified retirement. One sign of a selfless manager is capping funds, not taking more money to prevent existing client returns from being diluted.
The organisational structure is an important consideration. Maguire says private equity, aiming to maximise profits in more than seven years, is the worst structure. Being owned by a bank or life insurer also presents conflicts. These organisations are often highly bureaucratic and, for example, are reluctant to tailor remuneration policies for investment professionals. And just a small decline in performance can be highly damaging; the margin between success and failure is tiny.
A great fund manager gets 54% of his or her fund picks right — but to put this in perspective, Roger Federer wins 54% of points, and Alex Ferguson won 59% of matches at Manchester United. Considering that neither Federer’s nor Ferguson’s track record was diluted by fees, 54% positive from an asset manager after fees looks quite decent.
But a factor that fund managers underestimate is client fear of loss. Where the mandate permits there should be an 11th commandment: “Thou shalt not lose your client’s money.” As Maguire says, in behavioural psychology it is accepted that the regret of losing 10% is twice the joy of gaining 10%.
A business such as Fundhouse spends a lot of time processing factors such as returns and asset allocation but it is not a quants business. It aims to spot things such as the right temperament and true passion in an investment team. It has to show the ability to recover from poor performance, and needs a robust philosophy and process.
Do the fund groups that appeared on the Allan Gray platform qualify as good managers under the Fundhouse definition? At times in Maguire’s presentation he seemed to be referring to Allan Gray itself, even using its catch phrases, such as “longterm investing”.
It is a privately owned business in which the investment team has personal shareholdings. And it drills a particular investment philosophy into its analysts. This looks like groupthink from the outside but allows for seamless transitions. Most recently it was from Ian Liddle, who retired as chief investment officer, to Andrew Lapping. Temperamentally they are quite different. Lapping has none of Liddle’s aggressive confidence but they are at one when it comes to the shares they buy.
Coronation’s status as a listed company provides some disadvantages as it is being assessed by the market every six months and has to disclose key metrics such as operating margins, which competitors keep secret.
It can’t afford to have earnings that are too volatile, but fortunately it generates so much cash most people buy it for the dividends. I don’t have as clear a picture of Coronation’s philosophy as I do of Allan Gray. They describe it as valuation-based, a bit like calling a newspaper paper-and-ink-based. But it seems to work. I made the mistake of underrating chief investment officer Karl Leinberger in the past, but no longer.
Prudential has put consistency at the heart of its branding. It definitely lives up to it. Its philosophy has evolved, primarily to cope with its size. They used to be the apostles of value (though a PG-rated version relative to Allan Gray in the 1990s). Now quality seems to be their favourite word. It is almost half owned by the Prudential Group in the UK, but ever since Graham Mason started the business in 1994 it has run autonomously. It certainly counts as an independent, in my view, not a division of a life office.
Perpetua chief investment officer Delphine Govender was also on the platform. As a senior portfolio manager at Allan Gray she drank the Kool Aid. As a much smaller business Perpetua can revert to the original philosophy of Allan Gray, contrarian and often adding value through mid caps. She doesn’t own Naspers, for example.
Govender is a regular on the conference circuit and plays the black economic empowerment (BEE) card in a rather unsubtle way. But she’s a good manager by any standard, not just those of the still tiny BEE niche.
THERE SHOULD BE AN 11TH COMMANDMENT FOR MANAGERS: THOU SHALT NOT LOSE YOUR CLIENT’S MONEY