We identify three types of fund managers:
- Index Fund Managers believe in the reasonable efficiency of markets and that information is quickly reflected in prices, resulting in most other fund managers struggling to outperform the market average.
- Active Fund Managers’ objective is to outperform an Index or market average. This is a demanding objective, making the process of selection of fund managers critical.
- Thematic Fund Managers focus on specific themes, for example, Gold, Rand Hedge shares or Commodities. From time to time we will move from the market average for a portion of the portfolio. We may tilt towards or away from these fund managers.
Although most financial planners accept that past performance is a poor means of selecting fund managers, many investors still use this as a guide in the selection process. Past performance data is easily available, whereas obtaining qualitative information is difficult. The media focuses on historical performance and popularises the tendency to chase “yesterday’s hero”.
We prefer to select our fund managers based on five “performance drivers”:
- The fund manager’s investment philosophy should coincide with our own and be applied consistently.
- The people behind the organisation, their motivation, discipline, incentives, leadership and culture should be known, where possible.
- The fund manager’s processes need to be examined, including their research capabilities, the valuation tools they use, their risk management techniques, information technology and whether their systems are sufficiently robust and scalable to support future growth in volumes.
- The portfolio should be analysed to ensure that the fund manager’s philosophy and processes are reflected in the portfolio.
- Performance is analysed to assess the above drivers.
STYLE
We may blend styles that complement each other, rather than replicating styles.
- Large vs. Small capitalisation shares – large companies can be over-researched and opportunities overlooked in the small end of the market.
- Value vs. Growth – our preference is for value investing, when the market conditions are supportive.
- Active vs. Passive – we believe opportunities can be found outside of the Index and that many active fund managers do add value.
- Top-down vs. Bottom-up research – some fund managers begin their process by examining the macro-economic situation in the world, considering how this would impact regional and sectoral allocations and which companies would benefit most. Bottom-up managers choose good companies, with less emphasis on the sectors or regions in which they operate, believing that good management will extract efficiencies and profits.