How advisors pick funds
SO MUCH CHOICE: PAST PERFORMANCE WAS MOST IMPORTANT FACTOR
Advisors report placing the most emphasis on five-year returns, followed by seven-year returns.
SA has nearly 1 600 collective investment schemes registered. Given this level of choice, anyone using a financial advisor to make their investment decisions should want to know what criteria they’re using to decide on funds in their client portfolios.
Allan Gray’s Shaheed Mohamed compiled an analysis of the factors local advisors consider when selecting unit trusts for clients. Over 400 financial advisors were surveyed.
Past performance was the most important attribute. Absolute performance came out as the most significant factor in decision making, followed by relative performance against similar funds, or a benchmark. “The top three are all directly or indirectly related to performance,” said Mohamed. Long-term vs short-term returns:
Advisors reported placing the most emphasis on five-year returns, followed by seven-year returns. This encouragingly suggests advisors are making decisions based on longer-term performance. However this doesn’t match with data on fund flows, which rather appears to show money is moving in and out of funds based on short-term results.
“It’s possible that advis0rs do have a preference for longer-term performance, but when they meet with clients there is pressure on them to switch,” says Mohamed. Responsible investing:
Interestingly, responsible investing was the least important factor.
“I think this is becoming more and more important, and especially in a global context money has been flowing to self-proclaimed responsible investing funds. But it’s quite low down on the radar for advisors here.
“There might be a perception that if you are focusing purely on environmental, social and governance factors you might impact returns, but the reality is if you invest in companies that don’t take the environment or society or governance into account, that can erode returns over the long term and destroy value for clients,” Mohamed said. Tenure and qualifications:
Allan Gray released its research on the same day Leigh Köhler at Glacier by Sanlam put out a study on characteristics of fund managers in SA multi-asset and general-equity categories.
It looked at the relationship between factors like tenure and qualifications and fund performance.
Glacier found managers with tenure of 16-21 years produced the best five-year returns, particularly notable in general equity funds. Managers with an 11-16 year tenure performed better in the multi-asset high-equity and flexible fund categories.
This shows parallels with the Allan Gray analysis, which found that when looking at how long a fund manager has managed a fund, advisors prefer those with a tenure of longer than seven years.
What stood out in Glacier’s analysis, however, was that although 49% of local fund managers are CFA charter holders, fund managers with a CFA significantly underperformed those without – at higher levels of risk.
Fund managers with an MBA qualification, however, produced much better returns at lower levels of risk than those without an MBA.
Notably, Allan Gray’s analysis showed the qualification most advisors looked for was a CFA. An MBA was considered even less important than a CA or generic postgraduate degree.