You need to take a number of factors into account if you want to select an asset or a fund manager who will give you sustainable, sound investment performance over the long term, Matthew de Wet, the head of investments at Nedgroup Investments, says.
To identify investment managers who are positioned to perform well in the future, De Wet says you should try to select managers who:
- Have profound views on how performance is created. You need to understand exactly how managers intend to generate sustainable performance through different market cycles.
- Do what they say they will do. Their historic performance should be consistent with their purported process, philosophy and style. The managers should have proven their chosen style and the robustness of their process.
- Have a deep passion for investing. Investors are well served by entrusting their assets to managers who are focused on identifying the next good stock pick.
- Manage a fund whose performance will not be compromised by the growth aspirations of the management house. Managers who oversee smaller pools of money are afforded more flexibility, and this allows them to take advantage of opportunities that may be denied large players due to the sheer weight of the assets they manage.
- Have interests that are aligned with those of the investor. De Wet says there will be a closer alignment between your interests and theirs if the managers either own the businesses for which they work or have a large personal stake in the fund they manage.
- Have impeccable ethics.
De Wet says once you have selected a fund manager, it makes sense to stay invested for a reasonable period of time, or for as long as the manager continues to meet your criteria, as switching frequently leads to high costs and poor performance.
He warns that you must be prepared to accept that no manager is likely to perform well all the time.
"They will, no doubt, have bouts of relative out- and under-performance over shorter periods. Don't be disheartened by this, as it is your manager's ability to perform over the long term that is important."
National Trerasury's proposals on retirement fund reform
In its discussion document on retirement fund reform, the National Treasury details how it would like to see the retirement savings of members invested.
The treasury expresses strong opposition to individual fund members being given too much investment choice. It says the choices should be restricted to no more than five properly constructed investment portfolios.
The treasury says the main issues regarding the management of retirement fund investments are:
- The current regulations that govern how retirement funds may invest their money are designed to achieve diversification. Among other things, they limit how much a fund may invest in one particular asset class. However, the current regulations fail to provide trustees with guidance as to what constitutes an appropriate investment strategy.
The treasury says the regulations also encourage a "herd" mentality among asset managers, and prevent funds from making what may be appropriate investments in, for example, structured products.
The investment limits do not apply to retirement savings products that fall under the umbrella of insurance policies that include any form of guarantee. The treasury says this means that one of the main objectives of the investment regulations is undermined.
- A significant number of retirement funds give their members the option to select from a wide range of investment portfolios in which their retirement savings may be invested, regardless of whether they have the appropriate expertise to make such a decision. Some funds offer their members' expert assistance. Sometimes such assistance is available only to the members who earn high salaries.
Experience has shown that most members are more conservative in their investment choice than the trustees would have been if they had chosen on behalf of members. In the long run, this is likely to have an adverse affect on members' retirement benefits.
On the other hand, members who have the appropriate expertise can use this choice to tailor their investment portfolios to their particular risk profile and age, thereby enhancing their retirement benefits.
Furthermore, member investment choice is often introduced by a fund's service providers, who are motivated to expand the services they offer to the fund, instead of serving the members' best interests.
Recommendations
The National Treasury has made the following recommendations about investment choice:
- Funds should obtain expert advice when they adopt an investment strategy to ensure that it is properly formulated and appropriate for the fund. The strategy should be certified by the fund's valuator and communicated to members. Trustees must monitor the strategy, review it once a year, and report to the regulator on how the fund is complying with the conditions set out in the strategy.
- Funds should not be prohibited from investing in any particular asset class. However, there should be prohibitions on: the investments a fund can make in the employer sponsoring the retirement fund; investments in any single investment (in other words, investments in, say, one company); and investments made outside South Africa.
- The same rules should apply to direct investments and to investments made through insurance policies.
- Prudential limits should be set for the various asset classes for those funds whose boards of trustees are unable to devise and implement an investment strategy, usually because the size of the fund does not justify the expense involved.
- The regulator should set benchmarks against which the performance of asset managers may be assessed from time to time.
- Funds should be required to state, in writing to their members and participating employers, whether they intend to invest any part of the fund's assets in socially responsible investments (SRIs) that are likely to yield returns lower than those which may be expected from other investments made by the fund.
Funds will be permitted to invest up to 10 percent of their assets (by value) in SRIs, through collective investment or private equity schemes, provided that it can be reasonably expected that the investment's return will not be less than the inflation rate over the period of the investment.
The treasury says modern portfolio theory requires that the performance of a portfolio should be assessed as a whole. This means "funds should have a mix of investments, some of which may not be high-yielding in the short term, but which may assist in stabilising our economy in the long run. That role may be as important to protecting the security of retirement savings as is the role of high-yielding investments." As long as an SRI is sound - that is, it will retain the real capital value of the investment and a fund's SRIs do not exceed, say, 10 percent of its assets - it can make for a prudent investment, the treasury says.
- Trustees should be prohibited from giving members investment choice unless:
* The investment portfolios offered are selected because they reflect investment strategies consistent with those the trustees feel are appropriate for their members and the risks to which they will be exposed;
* The investment strategies and risks of each portfolio are explained to members;
* Members are provided with a default option with a limited number of options from which to choose; and
* The trustees monitor the performance of each investment portfolio against criteria contained in the fund's investment strategy and remove investment options if the performance of those options is not consistent with the criteria.
The treasury has proposed that funds with member investment choice that do not comply with the new regulations be given time to phase in compliance or phase out member investment choice.
The National Treasury warns that trustees will be guilty of improper delegation of their responsibilities if they delegate investment decision-making responsibilities to anyone other than someone appropriately qualified for the job.
This article was first published in Personal Finance magazine, 2nd Quarter 2006. See what's in our latest issue