Talkin’ about revolutions

Roland Rat was the puppet who saved a morning TV station in the UK. The slightly less sinister sounding Roland Rousseau is doing his best to save intelligent debate in fund management. Anyone can join in as he writes in recognisable English, not in the usual chartered financial analyst speak that could be created by machines.

Rousseau talks of the “four forces” shaping asset management. There is a shifting frontline of competition: the big question is not whether Allan Gray has outperformed Coronation or Investec. Rousseau rather wants to know why it hasn’t managed, over the past two years, to outperform index funds such as Satrix RAFI 40 or Dividend Plus. And the fee gap will be increasingly unacceptable, with Gray charging more than 2%, while Satrix charges more like 0.6% (which still looks high for a passive fund).

The downside: Rousseau says low fees will turn it into a budget airline industry. The main budget carriers are Satrix, Sygnia and Coreshares, which have beaten 80% of the active industry recently. So don’t be surprised if you see the heads of these businesses — Helena Conradie, Magda Wierzycka and Gareth Stobie — wheeling the drinks trolley next time you fly Kulula or Mango.

But it is not a simple case of passive funds replacing active. Rousseau’s four forces are, you guessed it, “disrupting” investment management. They are: the benchmarking revolution, in which new scientific methods are changing everything; the index revolution, in which index is not to be confused with passive; the portfolio construction revolution, a new modular approach; and the risk management revolution (it’s not about maximising return any more).

That’s four revolutions. I am tempted to find him a guillotine so at least the inevitable executions will be humane.

Rousseau says the move to index funds is about more than lower costs — it is also a way of accessing styles such as value, momentum and duration risk in bonds, which can all be accessed in neat, prepackaged, cheap, transparent and liquid portfolios. He believes the future belongs to those who can unpack market risk and get in and out in a day.

Ambitions

He is also a believer in lowering portfolio risk and he expects a move from traditional active return managers to active risk management services that use index strategies. He is, of course, talking to his book, as he has ambitions to become king of risk management services, hopefully avoiding the guillotine as the revolution progresses.

Fund managers will be measured by far more than beating the market — such as whether there has been suf- ficient reward to justify the risks taken. Rousseau says a lot of excess returns are due to excess exposures to factors such as small caps, which is not considered a skill. In SA there are already dedicated value and momentum funds that are an efficient way of isolating certain, let’s call them “positive”, risks.

Often a pension fund’s main managers have an overall tilt to value, so it makes sense to counteract this with a momentum portfolio, and you can be sure that unlike active managers this fund will both claim to be and have the characteristics of a momentum fund.

Rousseau is a firm supporter of the low volatility fund that has proved it can consistently deliver a much better risk-return trade off than a traditional active or even passive fund. “Low vol” funds reduce risk by 15%-45% compared with overall market risk. But he warns that in a smaller market such as SA there can be concentration risk if they are not properly constructed.

Rousseau believes the future belongs to those who can unpack market risk and get in and out in a day