” There is much research that supports the view that investor behaviour is a destroyer of investor returns1, and that investors should “stay the course”.
Investors are encouraged to stay the course, but look out for warning signals to re-evaluate a fund.
Having said that, we believe that you should re-evaluate a fund in which you are invested if one of the following warning signals is triggered:
- Change in the portfolio manager(s) and/or the supporting analyst team
The portfolio manager is the key individual responsible for delivering on the fund’s stated investment objective. Prior to making your investment, you (together with your financial advisor) would have evaluated the portfolio manager’s ability to deliver on the fund’s mandate. A change in portfolio manager necessitates an evaluation of the new portfolio manager’s ability to continue to do so.
In most instances, a portfolio manager is supported by a team of investment analysts. It is likely that these analysts play a significant role in the fund meeting its investment objective over time. Therefore, changes to the analyst team also necessitate the re-evaluation of the fund.
- Evidence of investment philosophy drift
When selecting a fund to assist you in meeting your long-term investment objectives, you may have done so based on the portfolio manager’s investment philosophy, for example value, growth or momentum-focused. It may be that after a period of underperformance because the investment style has been out of favour (value underperformance comes to mind over the past eight or so years), the portfolio manager starts to drift away from his stated investment philosophy. This style drift will likely result in the fund neither meeting its investment objective over time nor fulfilling the role for which you selected it. This should therefore trigger the re-evaluation of the fund.
A fund such as the Investec Diversified Income Fund aims to participate when the bond market outperforms cash and protect when the bond market underperforms cash. As illustrated in Figure 1, the fund has been able to consistently deliver on its cash plus objective over time. It is this sort of consistency through various market regimes that is important when considering which funds to include in your portfolio, as you need to be confident that the fund will continue to behave as you expect into the future.
Figure 1: Investec Diversified Income Fund: average rolling 12-month excess returns over cash
Source: StatPro and Bloomberg. Returns are calculated on a true daily time-weighted basis net of fees. Periodic returns are geometrically linked. Data from 30 September 2010 to 30 June 2019.
- Asset manager corporate action
Change in the ownership structure, particularly where the asset manager has been acquired by a third party can be very distracting for all staff, including investment professionals, if not managed correctly. Portfolio managers and investment analysts are only human, and a change in ownership could result in an inward focus. Independent, focused asset managers with significant staff ownership are well aligned to delivering on client expectations through time.
- A better alternative emerges
While the fund selected may continue to meet its investment objective over time, it may be that a better alternative emerges. It is important then that financial advisors (and their support team / fund selection partner) continue to research the peer group. If an alternative fund consistently delivers better risk-adjusted returns, it may make sense to introduce this fund into your portfolio.
- Value for money
It is important to ensure that you are sufficiently rewarded over the long term for the fee that you pay. A lower fee may not necessarily be an indicator of a better net return outcome. On the other hand, a higher fee needs to be scrutinised to ensure that you get value for money.
- Luck rather than skill
When you made the initial investment your analysis suggested that the portfolio manager had a demonstrable skill. But over time it now appears that, for whatever reason, this outperformance proved to be because of luck not skill. A re-evaluation is warranted given that luck is not enduring through time.
- Material changes to the economic and investment environment
Over time economies are expansionary and investment markets deliver positive returns, but both may become over heated. At this point it may make sense to de-risk your portfolio by reducing exposure to high beta funds (funds that follow a momentum investment philosophy, for example) and introducing more defensively-positioned funds (for example, funds that follow a quality investment philosophy). Unfortunately, timing such a move is extremely difficult and therefore it makes sense to include a defensively-managed fund to which you maintain exposure through the cycle.
While funds such as the Investec Cautious Managed, Opportunity or Global Franchise Funds meaningfully participate in strongly positive markets they demonstrate the true strength of the Quality team’s approach in sideways-moving and negative markets. The result is that they outperform through the market cycle, as illustrated in the following graph of the Investec Opportunity Fund. This enduring performance signature has benefited long-term investors.
Figure 2: Investec Opportunity Fund – relative strength in sideways to down markets
*Data since May 2000. Source: Morningstar, dates to 30 June 2019, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, fees are not applicable to market indices, where funds have an international allocation this is subject to dividend withholding tax, in South African rand.
While this list is not exhaustive, it provides some warning signals that should trigger the re-evaluation of your current fund holdings. Importantly, any change should be carefully considered in the context of your overall investment objectives and any potential capital gains tax consequences, which we will consider in a follow-up article. Again, we would recommend that you consult with a qualified financial advisor.
1Dalbar’s Quantitative Analysis of Investor Behaviour Study has been analysing investor returns since 1994 and has consistently found that the average investor earns much less than what market indices would suggest.