TowersWatsonAsset ManagerReview
What has changed over the last 20 years in the South African investment markets and investor community? What effects, positive or negative, have these changes had on the job of active fund management?
says the discussion on alpha is by its nature a direct discussion about the benchmarks asset managers chooses to compare their performance to.
The South Africa economy has evolved from a primarily resources-based economy to a primarily industrials-based economy, at least as far as the stock market is concerned.
In the early 2000’s, to mitigate the impact of concentration in large dual-listed Resources shares in the All Share Index, the predominant benchmark at the time, we saw the introduction of the SWIX indices.
The SWIX indices exclude foreign investors from the cal- Please share with us some of the investment lessons your senior investment professionals have learned during their careers. says consistency – fads are everywhere, do research properly, examine long enough periods so that you understand what really works and what doesn’t. Luck versus skill will show over time.
Have a plan before things go wrong. Whenever you enter a position have a plan for if the worst happens. People tend to make the worst decisions at the worst of times, it’s important to have a plan before things start to go wrong.
Over the long term take risk, there are always a million reasons why it is risky to be in the market, but over the long-term you get paid to take risk. The best times to invest are often the times when people are most afraid.
Be clear on your benchmarks, design investment portfolios for different purposes. Even the best golf clubs in the world make terrible cricket bats. Design different portfolios to achieve different risk profiles.
Positions that are obvious and comfortable to be in are already priced in. The market is not efficient, but it is pretty damn good. It is much harder to beat the market than people think.
Do not confuse volatility and risk. Just because something is not volatile, i.e. private equity, illiquid bonds, does not mean it has no risk.
Vice versa, just because something is very volatile does not mean it has a lot of risk. Ponzi schemes tend to be very smooth on the way up.
As said by Nassim Taleb: “the farmer is the turkey’s best friend until Thanksgiving Day”.
say to be a successful an investment professional requires three attributes, each of which brings with it valuable lessons.
The first is commitment and hard work. It is critical to do your homework and be thorough. Know as much as possible about your subject matter. culation to determine shares available to South African investors.
This exclusion gave local asset managers a fairer indication of the local investible shares available to them to select stocks from and thus a better benchmark to compare themselves to.
We may well be finding ourselves in a similar situation to that of the early 2000s, now with the SWIX index. Significant flows from foreign investors into the SA equity market, has increased the value of certain Industrial stocks in the SWIX and we are seeing signs of concentration.
This concentration has led to about two thirds of asset managers in 2014 not delivering alpha.
Over time, delivery of alpha from asset managers has been sold to investors as the mastering of the three P’s – people, process and philosophy.
The second is experience, which only comes with time. Valuable lessons are learnt through experience. It teaches you to have a long-term perspective.
It reminds you time and again that investing is not easy and that arrogance won’t be rewarded. Experience allows you to learn from your victories and mistakes, so that you are better equipped to repeat the former and avoid the latter in the future.
Thirdly, you should have some market instinct; an intuitive understanding of what drives markets (assuming of course that have a sound fundamental grounding in place).
It is highly unlikely that you will be blessed with equal measures of all three attributes. There is more than one investment style or philosophy that works over the long term.
An important lesson is to be honest with yourself. Understand what your strengths and weaknesses are and adopt the philosophy and investment approach that plays to your strengths.
We have also learnt the value of the environment in which you work.
Surround yourself with good people, as robust debate and a different perspective can relieve pressure and help you navigate difficult times in the market cycle.
Finally, stay in love with what you do. If you lose the passion, you should probably no longer be looking after other people’s money. says the company has written two books for internal use on the lessons it has learnt in its 22 years as an investment firm.
“In our opinion, the single most important thing one needs to get right in investments is to delay gratification and take the long-term view.
“It may be a trite observation, but in truth a long time horizon is something that is very hard to get right in an investment firm.
Some key lessons we have learnt over the years include: Don’t be stubborn – keep challenging your views and biases; pay up for quality companies; don’t underestimate the magni-
Asset managers who stuck to these factors uncompromisingly differentiated themselves through the outperformance of their portfolios and in the future this may not necessarily be good enough by itself.
Investors are now more often looking at the ability of the asset manager to provide specific solutions to their requirements which are more focused on outcomes over time and how alpha delivery can assist in achieving these objectives.
The discussion on solutions based investing and low cost passive investing have recently become a popular agenda items with investors, having moved from corridor talk a few years ago.
The advent of smart beta funds which aim to formulaically replicate most of the alpha active asset managers aim to produce has posed some hard questions for active asset managers. tude of change when the cycle does turn; and finally back special people – they have a way of creating more value than you can capture in a spreadsheet.”
says South Africa is not unique and we are part of a global world, and as such the country is correlated to global investment trends.
“We have found that big themes and global changes can shift our traditional investment criteria dramatically. We have also learnt not to ignore something because it looks expensive through our domestic South African lenses, for example, Aspen and Woolworths.”
says just because something is cheap, it doesn’t mean it should be bought. This is not a new lesson, but one that apparently needs to be learnt time and time again.
The importance of the quality of management: a good management team is not a guarantee of success, but a poor one has every chance of causing an investment case to fall.
Possibly because of intervention and the increased complexity of the players in the economy (e.g. regulators, hedge funds), cycles seem to be getting longer in a somewhat artificial way.
For example, the banks bailout caused excess capacity in many industries to prevail for a lot longer than it would have, had market forces been allowed to play out. MacroSolutions boutique says early in her career she learned to “keep it simple”.
“Translating that into equity investments ‘how does the company make money’ is the most important question, because in the long run share prices will follow profits.
“It made a big impression on me coming from an individual with a PhD in physics – certainly somebody who was capable of dealing with complexity.
“Secondly, over time I have realised that having a philosophical framework and sticking to it at all cost can poten-
With the outlook of lower returns from equity markets and the strong possibility of further rising interest rates in this cycle, asset managers are going to be hard pressed to eke out alpha to an expectant investment community.
says one of the standout highlights of the investment markets over the past 20 years has been the increased ability to externalise assets.
On the one hand, this has happened by virtue of changes to the various acts regulating the local savings industry.
On the other, corporate South Africa has likewise understood the risks of being contained by one set of borders.
Management’s response has been to either move primary listings offshore in order to access cheaper funding (and to work within walking distance of the Savoy Hotel in London) or, has added an international arm to its business models.
In theory, offshore diversification has increased the “smor- tially put the client’s investment at risk. In extreme cases even the investment firm could be put at risk.
“The investment framework should be such that it can cope with different kinds of market conditions.
“Thirdly, with patience generally being a necessary and helpful trait for investing, it remains an on-going learning process based on deciding when to be patient and when to admit error.” says one learns from experience rather than history. There is always an element of luck in successful investment management.
It is important to recognise to what extent a successful outcome was the result of good fortune and to what extent it was skill.
Often investments do well for reasons totally different to why they were bought in the first place. One needs to be very realistic about success.
says the investment horizon of investors has declined, which potentially means that the actual risk tolerance of clients is less than expected.
Clients have easier access to more information at their fingertips. Therefore, a portfolio manager has not only to achieve the investment objectives, but relative performance has also become important.
With the number of funds in South Africa exceeding the number of counters on the JSE, investors are tempted to back the fund topping the ranking tables – even if the track record is short.
says of the many lessons that the company’s professionals have learnt over the years, possibly the most pervasive is that everyone gets it wrong.
The question is whether the team is prepared to accept their errors and omissions or whether they insist on believing that they were right and the market “got it wrong”?
The lesson is that it is irrelevant if the manager was “technically right”. All that will be recorded is whether the client made or lost money! The scoreboard is right and all else is just ego. gasbord” of investment choices, with a free call on the Rand (which has done much of the heavy lifting).
This should therefore have provided those fund managers who were quick to hone their offshore expertise with an alpha advantage, assuming that they got the underlying call right. But that’s all it is – an assumption - not a guarantee.
says the biggest change is the change in the client.
Today’s retail clients are well informed, savvy, unimpressed by jargon and confident enough to demand answers.
Twenty years ago there was no financial planning profession. Brokers sold policies to clients. Financial advice as a value-adding proposition did not exist.
Today, industry professionals no longer serve corporate masters, they serve the client. Performance is critical, but investment professionals must also provide clear explanations of strategy and the rationale for positions in all asset classes.
Similarly, institutional oversight is much more robust. The quality of trustee questions has improved immeasurably.
The savvy client is a gamechanger. Chess provides an analogy. Classic chess between two opponents has a clear set of variables. Play four-handed chess and the variables increase exponentially.
Smart clients, watchful regulators and client-focused advisers now sit at the same board as the investment professional, all making moves that demand a strong, accurate response. says over the past 20 years business has become increasingly global. To a large extent prices in asset markets are determined by developments in the global economy.
These trends are particularly true of South Africa following the ending of its isolation in 1994. Companies have become larger and more inter- national. Foreign investors play a determining role in our fixed interest markets.
Successful active South African asset managers need to understand and keep abreast of developments elsewhere. one thing that stands out is that today, as opposed to 20 years ago, almost all successful entrants into the investment industry inevitably follow the Chartered Financial Analysts (CFA) programme.
This is great as it provides a solid body of knowledge and rigour to investment analysis. The downside, though, is that if everyone has followed the same training, it does not mean that you will have an edge!
“So the industry as a whole benefits, but an emphasis on rigor is never enough in a competitive world. If we look forward then, more training in the humanities should be emphasised for investment professionals seeking an edge.
“Improvements in technology and the availability of data has meant that investment analysis itself has also become easier to do, but the negative is that it is the interpretation of the analysis that has become more important and more difficult.”
says two decades ago, a portfolio manager could focus on beating a benchmark without due consideration to his or her investment style or risk budget.
Investors have been spoilt by the fact that both equities and bonds delivered solid, doubledigit nominal returns, making it fairly easy to deliver substantial real returns.
However in the past decade, academic work has emerged, highlighting the fact that returns are also driven by specific factors and styles so that pure alpha can be more easily isolated and the trade-off between the amount of risk taken and the return generated, can be better assessed.