Throw out the rule book and look at smaller managers
If the investment industry has learned one lesson from the global economic crisis and the protracted recovery that the world currently finds itself in, it has learned that discretion is the better part of valour.
While in the past it was perfectly acceptable to rush in where angel’s feared to tread by encouraging clients to invest in active funds that carried a higher amount of risk than passive funds, this does not give clients the necessary bang for their buck in the current environment.
Active funds were suitable to the economic environment when it was bullish. However, balanced funds have come to the fore in the current environment and may be the immediate future of the investment industry if we continue on this current path.
Where is your focus?
Because you are dealing with your client’s money, there may be a temptation to employ asset managers who are experienced and have access to a larger range of portfolios (opportunity set) than smaller managers by virtue of the funds at their disposal.
And one cannot be blamed for following this line of thought. However; Paul Wilson, Head of Asset Management Research at Sanlam Investments, believes that there could be a case for smaller managers to come to the fore in the near future.
“There could be a trend to focus on the skills of next generation managers. These are the managers who are smaller managers that don’t have large assets under management yet. This may be because of the size of the assets that larger managers manage. Research shows that as the amount of assets under management increases, the amount of counters managers can take in entrenching the fund’s position actually decreases,” says Wilson.
He adds that some larger managers may not be able to put as much capital behind their best ideas compared to what some smaller managers can do because they don’t have any limitations.
Playing the skills game
While the above does make sense in some ways, the common denominator is skills. Wilson points out that if you have two managers; one has access to a larger opportunity set and the other has access to a smaller opportunity set, it becomes harder for the manager who has access to the smaller opportunity set to excel given the odds against them.
“The key in this instance is skill levels. A Grand Chess Master will always win against an average chess player even if he has only half of his pieces available to him purely because he is that skilful. The key is to access highly skilful managers who can take advantage of the bigger opportunity set available to them.
The diamond in the rough
Companies can go the conventional route and look for managers who have a proven track record. But sometimes it is worthwhile to search for a diamond in the rough, asset managers who still have to prove themselves.
Wilson points out that Sanlam started its Multi Asset Balanced Fund over a year ago, but the process in choosing the asset managers to manage this fund began in 2012. “The key is for companies to do their research. It took us nearly three years to get the manager mix right. True value add of true manager research is trying to find hidden gems that not every company is looking at or looking for. Rather, they pick from a pool that not everybody knows.”
Wilson adds that key to this is making a fund sustainable. If a company is confident in the managers they have and the skillsets these managers possess, these managers should outperform in the long run.
The Tyson Theory
This makes perfect sense, and a lot of credit can be given to companies who feel that smaller asset managers should be given a fair chance. If we do not invest in smaller asset managers, how are they going to gain traction and become bigger asset managers?
But we cannot disregard the famous words of former World Heavyweight Champion Mike Tyson who famously said that everybody has a plan until they get punched in the face. Reports show that the South African economy grew by less than a quarter of a percent in the last quarter and many economists fear that the South African economy is heading for a recession in the near future.
Considering the fact that only 25% of investments can be placed offshore, do smaller asset managers have the plans that will brave the uncertain waters that we are heading towards? This is where experience comes in; you can have all of the skills in the world, but if you don’t have the experience to get out of a sticky situation, how can funds achieve sustainability?
This reminds me of a quote from Rocky VI. He said that it’s not how hard you can get hit; it's about how hard you can get hit and keep moving forward because that how winning is done. If smaller managers can take the hits that the recession can throw at them and come out whole at the other end, hang onto them because they will eventually add value to your company.
Editor’s Thoughts:
This is a bit like placing all of your money on one number at a roulette table. Are companies prepared to take the risk of turning towards young raw talent with a possible recession staring the economy in the face? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
