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In an environment of low returns, like we are currently experiencing,investors often scrutinise their investments a little more than normal. A natural process is to look at your performance and then ‘look over your shoulder’ at what others have achieved.
A whole variety of (negative) emotions can be triggered if those around you have done better than you, and the ‘logical’next step for most investors would be to switch to that ‘winning’ investment.
This is a phrase that is,by law, included on all unit trust MDDs (Minimum Document Disclosures or Fact Sheets) and one that is routinely ignored.
The phrase is typically understood in nominal terms, i.e. a fund that did 10% last year won’t necessarily do 10% this year (it could be down or up over 20%), but equally it should be understood in the context of relative returns, i.e. a top performing fund last year won’t necessarily be a top performing fund this year.
When assessing funds at Seed, we are very clear that we expect certain (buy listed) funds to do better than others over a full investment cycle. Where we have less conviction is when asked which of those buy listed funds will do the best over the coming year or two. All managers have differences in how they manage investments and their funds will, by extension, do better in different environments. Over the short term (1 or 2 years generally) there will be a lot a variability between the funds, but over the longer term (5 to 7 years generally) we expect the good funds to rise to the top and there will typically be not too much difference between them. Switching between managers every year is generally not a great strategy.
For this article I have looked at four of the largest South African Multi Asset High Equity Funds, that are all on our buy list, and compared how they have performed over the long term. As can be seen in Chart 1 below, over the past 15 years they have all performed broadly in line with one another (0.6% pa difference between the best and the worst) and materially ahead (at least 2.4% pa) of the Peer Group Average.
What was most interesting from the analysis was that if you did an annual review, and then switched to the best performing (over the past year) of these four funds then your total return was significantly lower than any of the four funds – and this is before CGT and any other slippage is brought into the equation. The result is even worse if you only switch when the fund that you are invested into was the worst of the four over the year. Constantly switching into the best performer is a poor investment strategy!
Chart 1: 15 Year Annualised Performance – to 31 October 2018
Source : Seed Investments (31 October 2018)
Investors/advisors should be doing an annual review, but annual reviews should focus on changes in personal circumstances, and changes to the underlying investments/funds should generally only be made if there are changes at the underlying manager.
When looking at the discrete 3 year performance of these funds (and then simply ranking them) it is evident that no single fund has a monopoly of being the top performer. Again,holding onto a fund for 3 years and then switching to the best performer has proven to be a poor investment strategy. The same is true if looking at discrete 5 year periods. It is interesting in Chart 2 below, that Fund D is the only fund to twice be at the top of the list, but that (as per Chart 1) it has been the worst performer over the full period.
Chart 2: Discrete 3 Year Periods – Fund Ranking
Source : Seed Investments (31 October 2018)
The key takeaway should be to select a manager/fund that you are comfortable with and stick to that decision. The only time a change should be made is when personal changes dictate a change in risk profile, which is where a quality advisor will assist in the assessment, or if there are material (negative) changes with regards to how the fund is managed (change in manager, changes at the investment company,etc), which is where Seed’s continuous manager research process will flag any issues.
In conclusion, this analysis isn’t meant to steer investors to one fund over another, but rather provide food for thought and try to prevent investors from making poor decisions based on ‘looking over your shoulder’. ALL managers will go through periods of doing well and periods of doing not so well. As multi managers, Seed makes use of a wide range of underlying managers. Our investment returns are therefore less reliant on a single investment house’s views/performance and will hopefully be more consistent relative to our peers,making the investment journey slightly easier to successfully navigate.