No easy way to pick fund manager

According to Morningstar there were 176 funds in the SA equity general category at end August. As the JSE has 375 companies, there are now almost half as many local equity funds as there are shares.

However, if there are so many funds available, choosing an asset manager becomes almost as complicated as picking stocks.

The performance difference between the top-performing general equity fund (Sygnia Divi Index Fund A, 15.88%) and the poorest over the last year (Investec Value Fund A, -21.40%) is 37.28%, according to Morningstar.

What makes this disparity even more confusing for investors is that, on face value, both funds follow value-investing strategies.

As the table shows, both funds delivered market-related performance in 2014, underperformed substantially in 2015, and rebounded in 2016. However, their fortunes have diverged materially since 2017.

How can the same broad philosophy deliver such different results?

Some might argue that as a passive fund tracking an index which only takes dividend yield into account, the Sygnia Divi Index Fund isn’t truly representative of value investing. That requires a manager making active decisions on where value’s available.

However, the year-to-date returns for local equity funds is another anomaly. The Investec Value Fund is again the worst performer, while the Counterpoint SCI Value Fund is eighth and the SIM Value Fund is in the top 15.

All these funds explicitly follow an active value strategy, yet produce completely different results. Are they genuinely all value funds? This illustrates the complexity facing investors. Even if one narrows the universe of equity funds down to the handful clearly classified as value funds, it’s still far from simple to choose between them.

This is one reason why investors globally have been moving more money into index funds.

What investors really find disappointing is active managers’ inconsistent returns. No fund manager can consistently guarantee outperformance or deliver it.

Investors can understand a market-related return. They can live with why their investment is going up or down because they can see the market doing the same. Active managers know this, hence many running closet index tracker funds.

Of course good fund managers will outperform over the long term. However, to beat the index you have to take positions different to the index.

Funds follow an active value strategy yet produce different results entirely.