Investors cautioned against the next best thing

Johannesburg, Mar 17 (I-Net Bridge) - Nedgroup Investments on Wednesday urged investors to stick with one fund manager, instead of falling prey to the next best thing.

Matthew de Wet, head of investments at Nedgroup Investments said: “The rewards of identifying the better fund managers are clear; over the past 10 years the top quartile of South African equity fund managers outperformed the bottom quartile by 5% per annum - and 5% per annum compounds dramatically over the longer term,” he said.

De Wet noted the challenge for investors was to identify the best performing fund managers in advance. “Not only is fund selection difficult, but investors usually find it hard to stick with their choice once the fund they choose inevitably goes through a poor patch,” he said.

“This rotation between funds is likely to be more punitive than being invested in a bottom quartile as opposed to a top quartile performer,” de Wet said.

The fund manager pointed to the Dalbar survey, which measures investor returns versus fund returns (the difference being the result of switching between funds), and indicated that over a 20-year period, US fund investors underperformed the average fund by nearly 8% per annum.

“The South African experience is likely to be similar. This 8% is the ‘investor behaviour’ penalty - the price investors pay for switching out of poor performing funds into better performing funds at an inappropriate time.

Given that the average fund in the survey delivered 12% per annum versus the average investor experience of 4% p.a., this implies that 2/3rds of returns were eroded by investor behaviour,” de Wet said.

Nedgroup advised that investors were likely to have a better experience if they expend their efforts on making an informed choice upfront, “and then teaching themselves the importance of staying the course and not falling prey to the next best thing”.

“The investment industry itself has a huge responsibility to investors to guide them appropriately rather than aggressively marketing the current ‘hot’ fund. Investment firms ultimately need to act as stewards of their clients’ capital,” de Wet said.

Nedgroup highlighted an initiative by Morningstar, the global provider of independent investment research, to rate investment firms according to a number of stewardship criteria, as opposed to simply using performance criteria.

“I believe that investors may be best served by identifying those fund managers that will act as responsible stewards of their capital and stick with them through performance ups and downs,” de Wet concluded.

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