Trouble when the stars stop shining
THE investment industry spends a lot of time, energy and money promoting its superstar fund managers.
When a fund manager wins a Raging Bull or Morningstar award, the marketing goes into overdrive — there are press releases, adverts and invitations to seminars to showcase the hottest new achiever.
Many investment advisers and also the investing public react positively to such good news. Everyone wants to be part of the act, even at the risk of investing in yesterday’s top performer.
The industry will try to down- play this fact and most investment advice comes with the proclaimer that “past performance is no guarantee of future performance”, but almost everyone participates in this game.
When a star-performing fund manager with cult-like status in the marketplace starts underperforming, it creates all kinds of problems for the fund companies concerned. Suddenly the whole investment proposition is turned around: “Don’t react to short-term underperformance,” they say; “investing is for the long term” and “stick to your long-term investment plan” — even though the fund manager is making a hash of it and losing clients’ money in relative and real terms.
This is a major conundrum for investors and more so for their advisers, who are paid to manage their investments and recommended the funds in the first place.
Which is it going to be: yesterday’s winners, or bearing the underperformance with no guarantee that the fund manager will get his or her investment mojo back again?
And for how long should an underperforming fund be tolerated? Is it six months, a year, or longer? And what about funds that underperform yet still attract and retain investment clients?
What advisers should not do is ignore the elephant in the room and hope the underperformance or poor performance will simply go away.
Why not? Well, there is that little piece of legislation called the Financial Advisory and Intermediary Act, which requires that you, as the adviser (and not the fund manager) take responsibility for handling the affairs of your client with “due skill and diligence”.
Already there have been one or two rulings against advisers who were taken to the ombud for financial services on the grounds that he or she had been either reckless or negligent.
The fund managers’ turn will come with the introduction of the Treating Customers Fairly legislation, which is heading this way from the UK in the next year or two.
Many star fund managers in South Africa are going through a torrid time as far as their performance, both relative and in absolute terms, is concerned. It is also no coincidence that they all seem to be followers of the so-called value investing style popularised by US magnate Warren Buffett.
Three funds in this category come to mind, all managed by capable and former outperforming fund managers, namely the Investec Value Fund (John Biccard), RE:CM Flexible Equity Fund (Piet Viljoen) and Cadiz Equity Ladder Fund (Francois Finlay).
There are more funds that seem to have fallen into a deep value trap, but these are the most prominent ones that, so far, have cost them and their clients dearly.
It would appear as if these fund managers took outsized, contrarian bets that — so far — have not come off, thereby exposing a latent risk, particularly in gold, platinum and commodity shares.
For instance, a year ago the Investec Value Fund had an exposure of about 31% to gold, platinum and related shares. It has since been reduced to 20% of the fund. And Biccard emphasised that the massive printing of money by the US Federal Reserve was hyperinflationary and would lead to a sharp rise in the gold price and hence South African gold shares. Gold shares have lost almost 65% of their value over the past four years.
Platinum shares, though massively cheap when compared with book values, have also lost ground post-Marikana, and the gold price in US dollar terms has dropped from $1 900 to about $1 270 an ounce. It will take a major shift in the investment momentum for this contrarian play to become profitable again.
Likewise, the Cadiz Equity Ladder Fund, a previous topperforming fund, has been hurt even more by its oversized exposure to Anglo American, Anglo American Platinum and other resource counters.
Investors and their advisers can tolerate below-par performance of a few percentage points for a while, but when a fund such as the Cadiz Equity Ladder underperforms the JSE All Share index by an astonishing 27% in one year you have to ask serious questions about remaining invested in the fund. And, on a cumulative basis over two years, the number is in excess of 40%.
The fund industry does not like discussing poorly performing fund managers and will rather downplay the issue. It remains up to advisers to track the investment funds recommended to their clients and formulate an appropriate exit strategy. Such strategy also needs to be clearly communicated. To hope for better returns is not an acceptable investment strategy.
Heystek is a director of Brenthurst Wealth