Follow Fundhouse’s Big Five to find a fine asset manager

Finally, a five-step formula for choosing a unit trust fund. Granted, these principles, touted by investment research provider Fundhouse are nothing new.

But investment dictums, such as “past returns are not predictors of future performance”, need to be heard a few times before they sink in — and the past year’s performance becomes no longer the sole basis on which to buy or bail out of a fund.

Fundhouse aims to “provide investment clarity in an increasingly complex investment world”, it says on its website. It was just as well that Rory Maguire, Fundhouse’s UK MD, was at last week’s Allan Gray investment seminar, where a heated panel discussion between four heavyweight investment professionals could have left audience members perplexed.

On the one hand it was impressive that the four panellists, who represented Coronation, Allan Gray, Prudential and Perpetua, had their own convictions and were not simply following the herd.

On the other hand, for fund houses that all profess to follow a value-driven approach to investing, which generally means they look to invest in undervalued assets, the managers’ views on companies were tremendously divergent.

Take Intu Properties, which Coronation’s chief investment officer, Karl Leinberger, thinks owns high-quality assets that trade at attractive dividends.

To the naysayers who say UK shopping centres are in structural decline because online shopping is killing brickand-mortar retailers, Leinberger responds that though the digital world means fewer stores, these stores are more valuable because companies treat them as showy flagship outlets.

Enter Allan Gray chief investment officer Andrew Lapping. Admittedly for different reasons, he thinks that Intu is “one of the most grossly overvalued stocks in the world and probably worth next to zero”.

Intu, says Lapping, is heavily indebted, generates no cash flow and has for years been paying money to shareholders that it doesn’t earn.

Intu was not the only stock over which the panel, which also included Perpetua’s chief investment officer, Delphine Govender, and portfolio manager at Prudential, Johny Lambridis, butted heads.

Others included Woolworths (Govender likes it, Leinberger does not) and Naspers (Lapping likes it, Govender does not).

The managers would not have disagreed on every share, as a glance at the top 10 holdings in their balanced funds indicates, but opposing views on some shares point to differences in their respective approaches to managing money that could leave even astute retail investors unsure of which asset manager to back.

This is an important choice, considering how few active managers outperform their benchmarks. Fundhouse’s research shows that the following principles are helpful for picking winners.

First, ignore short-term performance (anything less than five years minimum) and the accolades that go with it.

The average investor in a fund underperforms that fund’s return by 50% because of buying into the fund when it has performed well and selling out when it has performed poorly, says Maguire.

Second, stay invested for the long term. “Fund manager views often take a long time [to prove themselves].

“It’s important for investors to back those views over the long term,” Maguire says.

Third, the fund manager must be trustworthy, meaning their interests are aligned with their investors.

Ideally, says Maguire, they should have their own money invested in the fund, with research showing that more balanced fund managers outperform when this is the case.

The temperament of the team is principle number four: fund managers should be passionate about what they do, able to recover from poor investment decisions and have people on their team with differing views.

Finally, fund managers should explain their investment process clearly. “If your fund manager is saying what others say, it is likely that he or she is managing their business or career risk rather than your investment risk. For long-term value to be created by fund managers, we need to see strong outlier opinions coming to the fore,” Maguire says.

Now, resist the temptation to use the Raging Bull Awards as your investment strategy.

IGNORE SHORT-TERM PERFORMANCE (ANYTHING LESS THAN FIVE YEARS) AND THE ACCOLADES THAT GO WITH IT