Tuesday, 08 April 2014 - 20:00
Seed Weekly - Fund Manager Warning Signs
In last week’s newsletter, Multi Management Unveiled, we discussed the benefits and drawbacks of multi managers in helping investors achieve their investment objectives. The article also alluded to other benefits of being invested into multi managed funds.
Finding the correct underlying managers and developing the optimal strategy for a multi managed fund is only the initial responsibility of a multi manager. After an underlying fund has been included into a multi managed fund, the multi manager needs to monitor, inter alia, the following aspects:
• Underlying fund performance
• Change in portfolio manager
• Change in assets under management (AUM)
• Style drift
Underlying Fund Performance
“Past performance is no indication of future returns” is well know and used phrase in the investment world. A portfolio manager might have outperformed his/her investment objective in the past, but will this continue going forward? A multi manager needs to monitor the performance of the fund and check if the performance deviates from expectations.
A multi manager shouldn’t only be concerned if the fund underperforms, but also if it outperforms when it shouldn’t. An example is when a conservative manager outperforms in a bull market – the manager may be taking on unnecessary risks.
Change in Portfolio Manager
The portfolio manager and investment team tend to be the most important part of a fund’s performance. When a portfolio manager leaves, the multi manager needs to have an opinion on the manager that’s taking over and the depth and expertise of the remaining investment team.
The graph below shows the drop in AUM of a fund after a change in portfolio manager was announced at the end of 2013. The investors (including multi managed funds) clearly didn’t feel comfortable with the new arrangements and disinvested.
The graph below shows a fund that had two manager changes, one in September 2009 and the other in October 2012. On both occasions the investors were content with the new managers coming on board and didn’t see the need to disinvest.
At Seed, when there is an unannounced portfolio manager change, the fund is automatically removed from all short lists and only after we are able to meet with the new portfolio manager we will either put the fund back on the short list or disinvest.
Change in Assets Under Management (AUM)
An asset manager earns most of their income from the investments that they manage. When there is a sudden drop in AUM, it will lead to lower income earned and possibly become a going concern risk. Even if the asset manager is able to stay afloat, their priorities will in all likelihood change to focus more on generating new business (i.e. spend less time managing existing funds).
Boutiques and medium sized managers that have a few pension/institutional clients dominating their AUM are most at risk. There is a local asset manager that lost close to 90% of their AUM when institutional clients pulled their investments.
One of a multi manager’s goals is to blend uncorrelated investment styles in order to reduce the volatility of the fund and increase returns over the long term. When a manager’s style drifts, the underlying funds can become correlated and the benefit of diversification reduced.
The graph below shows how a manager’s investment style can change over time. The fund started off investing into Small cap value companies and over the years moved over to Mid/Large cap growth companies.
The benefit of a multi managed fund is peace of mind for investors. Multi managers continuously monitor the investments in the fund (across a variety of metrics) and keep an eye out for new and improved strategies/managers to incorporate.
021 914 4966
Tue, 08 Apr 2014
World Markets (Spot Prices)
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The JSE Today
* Includes all listed instruments on the JSE
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||58,360.33||281.85||0.49%|
|Oil & Gas ||43,472.01||186.16||0.43%|
|Oil & Gas Producers ||23,374.10||100.10||0.43%|
|Basic Materials ||29,826.18||56.68||0.19%|
|Forestry & Paper ||30,145.87||-1007.62||-3.23%|
|Industrial Metals ||21,341.76||605.68||2.92%|
|General Industrials ||139.94||.76||0.55%|
|Consumer Goods ||57,358.46||264.36||0.46%|
|Automobiles & Parts ||9,445.06||4.53||0.05%|
|Health Care ||76,046.74||-797.42||-1.04%|
|Index Name||RP||Move||% Move|
|Food Producers ||68,391.50||243.46||0.36%|
|Personal Goods ||999.76||-8.39||-0.83%|
|Consumer Services ||10,833.08||170.98||1.60%|
|General Retailers ||61,772.84||872.55||1.43%|
|Travel & Leisure ||5,502.34||-15.49||-0.28%|
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|Life Insurance ||33,838.90||-326.02||-0.95%|
|General Financial ||3,592.73||-2.67||-0.07%|
|SHARIAH TOP40 ||4,180.06||11||0.27%|
|FTSE/JSE SHARIAH ALL||4,271.24||9||0.20%|
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|JSE TABACO ||7,590.28||171||2.31%|
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Latest Consensus Changes**
|TBS||TIGER BRANDS LTD||BUY||02/04/2014|
|LEW||LEWIS GROUP LIMITED||HOLD||02/04/2014|
|AGL||ANGLO AMERICAN PLC||BUY||01/04/2014||
|Expected||Company Name||Fin. Date|
|09/04/2014||CIL||February 2014 (Interim)|
|09/04/2014||EFFICIENT||February 2014 (Interim)|
|11/04/2014||OANDO||December 2013 (Final)|
|11/04/2014||PHUMELELA||January 2014 (Interim)|
|11/04/2014||PURPLE||February 2014 (Interim)|
|NTC PREF||01/04/14||30/04/14||12/05/14||ZAR 3.5667|
|CND||Conduit Capital Ltd.||09/04/2014||Confirmed||
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