Wednesday, 06 July 2016 - 20:00

 

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Seed Weekly - Peer Groups acting as Benchmarks

The age old discussion surrounding benchmarks will carry on for as long as humans occupy this planet and have money available to invest. Are benchmarks set too low, making them very easy to beat? Are they set too high, making them hard to beat unless fund managers take on excessive risks? Is the frequency of assessment against the benchmark appropriate? In this weekly article we will be focusing on using peer groups as benchmarks and how they can add value to our investors.

The importance of peer groups can be argued endlessly. There will always be investors and investment managers who will argue that peer groups do not meet the complete investable benchmark criteria. Others will argue that we really do not know who has succeeded or failed because success against one peer group can easily be failure against another comparable peer group, so a manager can be both a success and a failure. Another possible disadvantage of peer groups is that they can mislead investors rather than inform them. The sell side knows how to deal with these problems: use the peer group that makes them look best and it’s the buy side (the investor) that suffers most from the problems with peer groups. Furthermore, the compensation of the fund manager typically depends solely on the value of assets under management, as more managers are moving away from a performance fee structure. Therefore, a fund manager’s bread and butter is not dependent on the value added by the fund manager, as there is typically no reward for outperforming the peer group benchmark and no penalty for underperforming these benchmarks.

Our view at Seed Investments is that although peer groups are not the perfect benchmark (if there is even such a thing as a perfect benchmark), peer groups have their place under the “benchmark sun”. Some asset managers take the position that they are going to disregard what other institutions are doing, and simply follow their own vision. This attitude ignores what may well be the best thinking on the topic. Some examples of herd behaviour in investing may exist, but in general, any sound asset manager takes their responsibilities seriously and is highly capable. These professionals have, as their responsibility, the task of thinking about what asset mix is best for their funds and then implementing it.

We believe in what we do, but every now and then we need to measure our performance against our peers to ensure that we have not wandered off and lost the plot completely. While it is good to follow your own ideas and dreams, it is important to respect the conclusions of generally well-informed and well-meaning peers. This does not mean you should not vary from the allocations of your peer group if your mandate or risk tolerance is different from theirs, but you will get in real trouble by thinking you don’t have peers when you most definitely do. Consequently, the long-term success of any fund management house in some way depends on its relative performance against its peer group.

At Seed Investments, we make use of peer groups as benchmarks across the range of our products. Below is a risk adjusted return graph of the Seed Balanced fund compared to the ASISA South African Multi Asset High Equity peer group. The graph illustrates that the Seed Balanced fund has achieved a higher return than the peer group average albeit at taking on a little more risk (standard deviation).

Figure 1: Risk Reward (Time period 01/07/2010 – 31/05/2016)

Source: Morningstar 29 June 2016

This is one of the graphs we use to compare our performance to the peer group. Seed will always, to the best of our ability and knowledge, use the most relevant peer group to compare our funds against. This will ensure that we keep track of our own progress without losing touch with our peer group and will give our clients peace of mind that they can compare our funds with the appropriate funds in the industry.

Kind regards,

Stephan van der Merwe

Tel +27 21 914 4966
Fax +27 21 914 4912
Email info@seedinvestments.co.za

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Wed, 06 Jul 2016

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