Three factors to run rings around your competitors this year
Asset manager presentations are dime-a-dozen in the first two months of the New Year, with dominant global and local brands wooing financial advisers with multi-year historic performances and promises of return dominance over the coming 12-months. This year’s M&G Investments presentation was no different as key personnel confirmed highlighted performances by its Equity and Dividend Maximiser funds. As this writer listened to the familiar message he wondered: what if local intermediaries could integrate some of the strategies used by successful fund managers into their advice practices?
Open source ‘winning’ investment methodologies
In a world where transparency is in short supply it amazes that fund managers are so open with their ‘winning’ investment methodologies. The best explanation for this openness is that they want to convince financial advisers that the engines that power their asset allocation and financial-instrument-selection decision making are ‘next level’, thus guaranteed to leave competitors in the proverbial dust. “This chart illustrates the power of compounding and consistency,” commented Ross Biggs, Head of Equity at M&G, as he took to the virtual platform for the group’s Q1 2023 outlook discussion, held under the banner: ‘SA Equities [offer] attractive returns for long-term investors’. More on the return prospects later; first let us interrogate the strategy.
Biggs wasted little time in identifying consistency as the secret ‘weapon’ in the asset manager’s long-term performance arsenal. “The most important thing that we focus on is consistency [which] has, over time, given us our competitive edge,” he said, before diving into the three core factors that deliver this consistency. For relevance to financial advice practices, you should reflect of the value of consistency in approach when dealing with clients. In fact, consistency is non-negotiable for businesses offering products and services to consumers, and a consistent approach to consumer engagement goes some way to giving your business an edge over the competition. Having accepted consistency as a non-negotiable it is time to delve into the three factors that guarantee it, as shared by Biggs during his introductory remarks.
Factor one: a strong philosophy
“It is critical to have a solid base in terms of the philosophy that you employ … and to continually improve and enhance the process,” said Biggs. You can equate philosophy with investment methodology, because this is the factor that guides the asset manager’s decision making. M&G has developed its philosophy over a period spanning almost three decades. And this writer recalls similar consistent approaches to philosophy at other successful fund management brands. For example, PSG Asset Management has, for decades, selected companies based on a 3M methodology. PS, 3M refers to moat, management and ‘margin of safety’.
How can financial advice practices and other small businesses leverage the philosophy factor to write more business more profitably? It helps to think of philosophy as the defining or guiding principles that filter through to the approach, culture and processes that you develop in your business over time. If you achieve consistency in approach, culture and processes your clients will know what to expect from you and be far more likely to recommend your business to their network. As an aside, this writer spent some time on ‘the Google’ interrogating its knowledge base about the intersection of culture and philosophy, but these enquiries opened up a wormhole that is far too complex to dive through for this 1000-word piece.
Factor two: sound risk management
Risk management stands out as the second factor for consistency, especially in the financial market returns context. “Sound risk management is a very underrated part of portfolio management … we must be very cognisant about the risks that we take into our portfolios,” said Biggs. He noted that risk limits were essential to protect portfolios and ensure that funds outperform both benchmarks and indices. An asset manager’s approach to risk management is very different from that which a financial adviser or small business owner would adopt, as is the concept of risk. The asset manager’s approach to risk management in achieving a targeted portfolio return is, however, reasonably aligned with the approach a financial adviser might take at the individual client level.
Factor three: people
Finally, the third factor in the consistency equation is having the right people in place in your business. “A strong and stable team is critical to good investment outcomes; we spend a lot of time mentoring our team and ensuring that we have good people coming up,” said Biggs. Financial advisers will not need much convincing about the ‘right person for the job’ construct given how competitive the industry is. And financial advisers are more aware than most small business owners of the need to be top achievers due to their revenue models often being commission and / or volume of business based. Having the right people in your financial advice practice is critical for a sustainable business and makes the succession hurdle easier to overcome too.
Ok, something about SA equities
Turning to the equities part of the presentation, this writer enjoyed how M&G addressed concerns over South Africa’s myriad macroeconomic challenges. After drawing the audience’s attention to the poor corporate earnings outlook and the country’s dismal 2023 GDP growth forecast, Rushil Jaga, Investment Specialist: Corporate Market at the firm, asked whether it was necessary for the South African economy to ‘fire’ for local equities to do well. FAnews readers may be aware that the South African Reserve Bank recently dropped its GDP expectation to a mere 0.3% for the current 12-months.
“It is a fallacy that you can predict stock market returns by predicting economic returns,” said Biggs, before sharing a chart of SA GDP per calendar year against the performance of the South African stock market over each year. This graph showed during which the GDP was running as hot as 8% while the JSE All Share delivered negative returns; and years where GDP was negative and the JSE achieved double-digit positive returns. “It can be entertaining talking about what is going to happen to the economy or in the political landscape, but it does not help you to predict or ascertain stock market returns,” he said. Another important observation re the domestic economy is that more than a third of the revenue earned by JSE-listed shares comes from offshore.
Reducing offshore exposure since pandemic
The good news for investors loyal to the South Africa Inc story is that local equities seem “relatively attractive” compared to global markets. “We are only trading on a 1.8 times price-to-book [compared to] in excess of two times price-to-book historically … the South African market, together with quite a few others, excluding the US, look particularly attractive at present,” said Biggs. He also observed that a valuation gap had opened up between the JSE and global markets during the COVID pandemic as investors rushed to defensive, quality companies. This valuation gap explains why M&G aggressively reduced the offshore exposure in its Equity and Dividend Maximiser funds to around 20% between 2020 and present day.
In his closing remarks, Biggs commented that the JSE remained attractive despite concerns around Eskom and Transnet. “We are finding plenty of opportunities to make alpha for our clients,” he said, singling out the likes of Omnia and Textainer. PS, this is not a share tipping newsletter, and this one-liner does not constitute financial advice. But the final message shared by the M&G team before ‘question time’ was not stock specific. “If you consistently apply the principles of a strong philosophy, sound risk management and a strong and stable team you can generate consistent outperformance over various time periods,” concluded Biggs. This writer is certain that financial advice practices and small businesses that integrate these factors into their operations will benefit.
Writer’s thoughts:
The repetitiveness of reporting on dozens of insurance and investment presentations each year forced this writer to find new ways to digest, interpret and share such content. One possibility is to attend each event with an open mind, and to try and find different ways to interpret and report its key messages. Have you ever been surprised by a valuable ‘lesson’ learned from an otherwise run-of-the-mill presentation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
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