People often ask and debate about who the best asset managers in South Africa are. The Asset management industry hands out awards like winemakers, so it can be tricky to really know. Spoiler alert: this article won’t propose to give you an answer. Rather, we discuss the value of an asset management brand, and how to decide what really matters.
Disclaimer (lol): This post may come across cynical or negative towards fund managers. I personally have nothing against fund managers, and I do have 2 investments with “big name” asset managers. I do however select the products very carefully and weigh up my options. So, don’t take this too personally if you are in the asset management industry.
Some preamble to the discussion
In the post on how to “work” the market I explain what the theory of efficient markets is and how index investing earns you the same returns as managed funds over the long run, and for a LOT cheaper. Not always I know, but in general. I also stress that buying a unit trust or investing purely on the basis that it did well last year, is a little naive.
This conclusion all revolved around the active vs passive debate; do fund managers who actively manage your money in a portfolio add any value over the long term, over that of a passively managed fund that simply tracks an index? Should it be that an active manager is not adding any value vs. a passive fund, then the fees that you’re paying them are a drag on the long-term performance of your investment portfolio; deadweight if you will.
What should you consider when looking for the best asset managers in South Africa?
Prior success does not predict future success
If you trust in the strategy of passive investing then you must realise that choosing to place your money with an asset management company simply because they did well last year, or in any year for that matter, is illogical. The fact that they did well last year was, simply put, not their doing.
Asset allocation is the real driver of investment performance, NOT the people who manage the funds. And yes, the people are very clever and well qualified (and HIGHLY paid), but no-one can predict markets and no-one can assure you the returns that you may be after.
That’s probably why almost every asset manager has similar wording at the bottom of their webpage, brochure, and fund documents. A quick sample from a well-known asset manager’s literature reads as follows:
Important information that should be considered before investing in the XXX Fund
The XXX Fund should be considered a long-term investment. The value of units may go up or down, and is therefore not guaranteed. Past performance is not necessarily an indication of future performance.
Note the underlined sentence.
Why do they say this?
I like to think that there are two reasons for this.
The first is that they want to disclaim away any notion that you might have that because their fund did well last year, you are entitled to expect it to do well this year. The last thing they need is thousands of investors wanting their money back, after having being sold some kind of implied guaranteed return.
Secondly, they know that their ability to outperform an index that matches their benchmark over the long-term is not within their control.
The irony about all of this, is that if you’re the Chief Executive of a big asset management company, the only way you have to differentiate yourself from all the other asset managers, is to advertise your funds that previously did well, hoping that the public will believe that you’re good at what you do – making people more money.
To trust in passively managed funds though, is to see through this advertising as a waste of time. It’s a waste of time to you if you were doing your due diligence as to where to invest your money, but it certainly isn’t money poorly spent if you’re trying to convince the uninformed investor that you’re worth the fees you charge.
What really matters if results are the same?
Imagine though if everybody’s passive index fund performed exactly the same as everybody else’s. How would you then choose between different asset managers?
The best client reporting?
The friendliest call centre?
Largest asset manager?
Or maybe the one with the best screenplay for their TV ad?
As silly as this all sounds, this is where your headspace needs to be right now.
Being the marketing exec at an Ad agency for a big asset manager must be one heck of a job. You would need to come up with reasons to get the likes of you and me to invest with a particular asset manager, for reasons other than actually giving you what you think you’re paying for – higher returns.
But maybe that’s just advertising in general?
Who can you trust?
So where should you be looking for a place to manage your money? If the guys who are telling you how wonderfully they did last year aren’t necessarily the best, what’s a person to do?
I think it’s far more important to find an extraordinary financial advisor. Remember that it is an independent financial advisor who will help you make decisions around how much you should be investing in the various asset classes, after having done a comprehensive and considered approach of your personal financial needs.
It is far more important to be exposed to the correct and appropriate asset classes than it is to find the best asset manager.
Asset managers are simply the ingredients in a wider concoction that is your financial life, and in many instances the ones that charge you the least fees, are the best ones.
This is all part of a wider topic on financial advisors that we won’t get into detail now, but people’s unwillingness to engage in getting financial advice is no secret. Whether it’s because of the history of the industry or people’s inflated belief in their own ability, trillions of dollars, rands, pounds, yen….pick one… have been transferred from long-term savings of investors to shareholders of asset management companies.
If you really want an edge over life, and figure that you need all the help that you can get, given that you’re 35, and pretty much live payday to payday, then find a brilliant financial advisor. Ask your most financially adult friend for a recommendation or book a free session with my own financial planner.
A trusted and honest advisor who truly understands core principles like index investing, diversification, and the risk / return tradeoff, means you’re in good hands.
My apologies if you were looking for a definitive answer about who the best asset managers in South Africa are. I’m sure a quick online search will offer you many answers. But, consider the arguments above when deciding who to invest with.
Do you agree with this? Have your own comments? Let me know.