Roeloff Horne, Head of South African Portfolio Management, was recently interviewed by InvestSA.
1.What are the benefits of the single manager approach?
The investor gains access to professional security analysis and research of an investment specialist or a team of specialists that can actively manage a series of securities within a specific asset class or across asset classes. A key benefit of a single manager is that they normally have a clear philosophy and approach on how they manage money.
2. And the disadvantages?
The single manager has to utilise its expertise adequately to generate out performance relative to its benchmark. Long-term statistics prove that global specialist single manager solutions often underperform their benchmark due to fees. The reality is that active single managers do incur costs to implement bottom-up sector and company research, which can then raise the cost of the investment and thus makes it harder to outperform a relative benchmark after fees. Investors are restricted to a single investment philosophy and view. This view will not always be right and when it’s not working, an investor may wonder about having all their eggs in one basket.
3 . One of the complaints is that single managed funds are too risky. What is your view?
Single managed funds can be risky because the manager may get something wrong, and there is no diversification of this manager risk. This also implies potential business risk for advisers. If the investor’s needs, risk profile and investment horizon are matched by the mandate of the fund, and the manager sticks to their philosophy and approach, there shouldn’t be any inappropriate investment risk. But, where investors use performance tables to randomly select a single manager due to post performance, the strategy becomes risky.
4. What should an adviser look for when choosing a single managed fund?
An adviser should first ensure that the fund mandate matches the needs of their client. If so, determine if the manager is equipped to deliver on the mandate by looking at investment philosophy, approach and track record. If the adviser is looking at a single managed fund to be part of a portfolio of different funds, it would be important to perform a medium and long-term risk and return attribution (Alpha/ Sharpe/Standard Deviation) analysis and blend funds in a manner to include a combination of funds that are less correlated to one another with awareness of the dangers of over-diversification. Once a fund is selected, it is obviously important that the adviser is able to gain reasonable access to ongoing information on the manager’s portfolio and views, while performing a performance review on a quarterly basis.
5. Should one even compare single and multi-managed funds?
Yes, but only where the fund mandates are similar. The perception is that single managed funds are cheaper than multi-managed funds. There is certainly a cost to multi-management, but multi-managers usually gain access to single managers at institutional rates and can also invest in low-cost passive investments, which means the final cost to the investor may be the same or even lower despite being invested in a multi-managed fund. Investors also have the option of combining single and multi-manager multi-asset funds. In this way the investor gains access to the best of both worlds. You gain the expertise, investment philosophy and process of the single manager, while the multi-manager can blend passive index solutions with an active single manager to improve the probability of generating outperformance, often at lower risk.
6. What risk profile should someone have to choose a single managed fund?
Any type of risk profile on condition that the fund matches the investor’s risk profile, return requirement, investment horizon and risk capacity.
7. What are the biggest challenges investors are facing right now and how does the multi-manager approach serve to offer value in the current economic climate?
The biggest challenge investors always face is where to invest. Using past performance as your only guide may lead you to buy expensive assets. The other challenge investors face is the regulatory environment. Advisers are being forced to be more accountable for the investment decisions that they make, which is a good thing. But as a result, many in South Africa have migrated to simply using balanced funds. This move has also meant that the large asset management companies have gained market share due to their brand awareness and post performance, but are becoming so big that their ability to deliver consistent performance may now be under pressure. Multi-managers can easily overcome this problem by selecting funds or smaller managers that have larger allocations to these smaller asset classes and can apply tactical asset allocation techniques to adjust exposure to different managers and asset classes when appropriate. Multi-managers help reduce the adviser’s and investor’s selection risk.
LINK: InvestSA website: http://www.investsa.co.za/
