WORDS ON WEALTH
Martin Hesse
The annual Raging Bull Awards, launched by Personal Finance founding editor Bruce Cameron in the late 1990s, recognises outstanding performance by unit trust fund managers. Over its 25 years it has built a reputation in the investment industry as a unique showcase for funds and asset management companies that deliver consistently superior returns for investors, as well as being a way of simply rewarding top-performing fund managers for a job well done.
Until two years ago it took the form of a grand and glittering black-tie dinner, but Covid-19 put a stop to that. Last year the awards were announced via a streamed online video presentation, and the format has been retained for this year's event, at 7pm, tomorrow Tuesday February 1 on the IOL YouTube channel. Please tune in.
Two criticisms come up regarding the awards and I shall deal with each one in turn.
The first revolves around the well-worn truism "past performance is no indicator of future performance". Should the awards be used by investors to guide them in their choice of funds? Research has, in fact, shown that a fund that has underperformed in a particular year is likely to perform better in the subsequent year than one that has outperformed.
My counter-arguments are that:
- Reputation counts, because what else do you have to go on? This is the case when choosing a doctor, a plumber, or a mechanic for your car. Past performance establishes a service provider's reputation, a major selling point. New kids on the block may be just as good, if not better, but you don't know that until they have a history of performance on which you can make a judgement.
- The Raging Bull Awards are in two categories: for straight performance over three years and for risk-adjusted performance over five years. The risk-adjusted awards over five years, which is the more relevant category for investors deciding where to invest their money, take account of consistency of performance and the relative "smoothness" of the performance curve over a full five years, thereby giving investors a good idea of how well a fund manager balances risk and reward over a relatively long time frame.
The second criticism revolves around the human factor. The awards rate human performance; they are for actively managed funds. Passively managed index-tracking funds do not require much in the way of human intervention. There is no room here to get into the passive-versus-active debate, which I have written on before. However, the bulk of investment assets in South Africa, and as far as I know in the US and Europe, remain in actively managed funds. So until machines and artificial intelligence replace active management, error-prone humans will still be managing our money in the foreseeable future, so for the time being we can honour those who show themselves to be a cut above the rest.
QUALITIES OF A GOOD FUND MANAGER
So what makes a good fund manager? What are the qualities that the Raging Bull Awards seek to recognise?
Rory Maguire, the managing director of British investment consultancy Fundhouse, offered some guidance a couple of years ago at an Allan Gray Investment Summit. “Asset managers are stewards of your capital. It’s important that they understand that the money they manage is yours – there must be trust,” he said.
There are a number of things you can check for:
- The business structure of the company must allow for a long-term view, without shareholders pressurising the company to chase short-term earnings. Privately owned companies and family- or staff-owned companies tend to do better in this respect, Maguire said.
- There must be consistency in how a fund is managed, and this comes through a stable, professional team. Key things to look for are passion, experience, flexibility, diversity and humility. “Look out for companies that may be employing similarly-minded people. You get better answers through disagreements and proper debate,” Maguire said. “Managers that add value to your portfolio are those that take different views to the market. But to do that requires the right temperament, which is very hard to pinpoint. However, negative temperament is quite easy to spot. When you get defensive, ego-based answers to performance dips, be careful.”
- The investment process must be consistent. Asset managers employ different investment styles, but whatever the style, the company must be consistent in its investment process, which should counteract the human biases that result in bad investment decisions.
- If you are looking at past performance, Maguire said it’s worthless looking at anything less than five-year periods. “The top South African fund managers are quite consistent for five-year performance over long periods. Any shorter period is absolutely meaningless. There is nothing predictive to be gained by looking at shorter than five years, and five years is slightly less predictive than 10,” he said.
PERSONAL FINANCE