Going into any partnership requires research. Objectives need to align, value systems should resonate and trust plays a key role. These same criteria should guide your decision when picking an asset manager. If you make the right choice, you could be on the path to a successful long-term relationship. Thandi Ngwane, head of Strategic Markets at Allan Gray, offers some guidelines to help you choose an asset management partner. Picking the right investment partner can be overwhelming; if you don’t feel equipped it is worthwhile talking to a good, independent financial adviser.
Top Tip 1: Understand the investment philosophy
Every asset manager has an investment philosophy – a stated way that they invest. Make sure that you understand the investment philosophy, and it resonates with you.
“The important thing is that your manager sticks to their philosophy; changing tack to chase returns, or trying to time the market, is fraught with issues,” says Ngwane, adding that having the right people with the right experience is crucial for the asset manager to be able to apply their philosophy and processes. “Ultimately these determine the success of the outcome in the form of long-term performance,” she notes.
A good initial question to ask is whether the asset manager is a ‘passive’ or ‘active’ investor.
Passive managers don’t make active choices about what to own and what to leave out of their clients’ portfolios. They buy a small amount of all the shares in the relevant stock-market index(shares representing the overall market), normally in proportion to the market price of the company that that share represents. For passive managers, the current price of each share is the best indicator of its long-term value.
Active managers, on the other hand, can do better or worse than the market depending on which individual shares or other investments they choose to own for their clients, and which they choose not to own. Not owning a share can have a positive outcome relative to the market, if that share loses value and drags down the overall market.
Top Tip 2: Look for a long-term track record
Asset managers should be able to replicate good past performance over the long term and preferably through several market cycles, using the same investment philosophy.
“Investors tend to focus primarily on recent performance. But past performance is exactly that – in the past; there is no guarantee that it will be replicated over the long term. Investors should get a holistic view when selecting asset managers by looking at performance over time.”
Top Tip 3: Set realistic expectations
“While you absolutely must hold your asset manager accountable, you should also have realistic expectations from your asset manager,” says Ngwane. “If you understand the asset manager’s philosophy, then you should also understand the asset manager’s investment choices and short-term swings in performance.”
The prices of shares move when they are bought and sold. On each share trade there is a buyer and a seller, and looking back, one of these will be right and one wrong because valuations are never certain.
“You need to be aware that sometimes, regardless of which asset manager you choose, the lucky manager will be right. However, over the long term, more often than not, it is managers with better skills who come out on top,” says Ngwane.
Active asset managers often invest in ways that are contrary to the popular opinions of the time and so their portfolios may be going down while the market is going up, which can cause anxiety for some investors. Passive asset managers are often not in danger of doing much worse than the market but on an after-fee basis, the average passive investor will be guaranteed to do a little worse than the index, but not by much.
Ngwane adds: “If asset managers are skilled enough over the long term to get more than half of these decisions right, and if they also put a bit more money in the winners than in the losers in their portfolios, they grow the savings of their clients by more than had they invested in the index.”
Asset managers are effectively custodians of investors’ savings and investments, so investors have to be confident in the asset manager they pick. Ngwane encourages investors to leave their emotions at the door and remain focused on their objectives.
“It is important to have confidence in the asset manager you choose. This will make it easier to stick with your choice during periods of underperformance so that you can enjoy the returns when they come.”
Thandi Ngwane, head of Strategic Markets at Allan Gray
Get the latest issue of FAnews