Tickets for the non-stop roller coaster now on sale
The investment industry has been riding a non-stop express roller coaster for a while now. When specific driving factors abate, new ones come to the fore forcing fund managers, and advisers, to ask where the next set of challenges are going to come from.
However, only one challenge matters: where am I going to find alpha. At the end of the day, clients are generally unsympathetic with the length of the roller coaster ride when they discover their investment never lived up to the promises it made. And when clients become unsympathetic, they can become unforgiving.
What are investors doing?
A release by Sanlam Glacier points out that during the first three months of 2016 it saw quite a bit of volatility in the markets with investors acting in response to this.
Looking at the first quarter statistics from the Association of Savings and Investments South Africa, we can see that while the trend of moving into multi-asset class funds continues, approximately 23% of net inflows went to the money market category.
At the other end, most of the net outflows were from the more risky asset class categories such as equity and property.
Once bitten, twice shy
In behavioural finance, there is a bias called loss aversion which relates to an investor’s preference to avoid losses rather than making gains. Many studies suggest that the pain derived from market losses impacts an investor twice as much as the pleasure felt from making gains.
During corrections and market crises, investors who are in the market tend to experience significant losses. These experiences impact them going forward during times of volatility. When there are indications that markets may correct, investors mitigate their potential losses by moving to less risky assets.
The dangers of timing the market
However, this strategy does not come without its potential downside. An investor moving to cash may, and often does, miss the upside when markets rebound.
Timing the market is definitely not the easiest strategy as you have to be right twice – when to switch to cash and when to move back into growth assets. The chance of being bitten twice is more probable than being right twice. It is thus vitally important for investors to understand the potential impact of their decision.
The eternal debate
This feeds into the active vs passive investment debate which will probably rage on until the end of time.
A release by 10X Investments shows that while most active fund managers argue that their skills enable them to outperform the market return, the majority of research proves what passive managers have known all along, that even though it may be possible for a fund to outperform the market, it is generally not probable.
Know your universe
In the finance industry, the term investment universe refers to a specific group of investments that share certain characteristics. This universe can be defined as large as all listed shares in the world, or as narrow as the top 40 shares listed on the JSE.
It can also refer to a particular country, industry or sector, or to a particular factor that underlines a group of investments, such as size or valuation.
Steven Nathan, CEO of 10X Investments, feels that such demarcations are important as they enable us to evaluate the performance (skill) of a manager investing in securities from that universe.
He adds that by identifying all the securities within a universe, it is possible to calculate a benchmark return. The fund manager’s performance can then be judged relative to that benchmark return.
The truth about active
Nathan points out that the latest SPIVA scorecards confirm a long-standing trend: the great majority of actively-managed funds underperform the benchmark return after fees, both globally and in South Africa.
Compared to previous years, 2015 was generally a better year for active managers, as more than half beat the benchmark return in some regions (notably Europe and Australia). But, measured over 5 years, this was not the case for any region or country included in the SPIVA survey. In the two largest markets, Europe and the US, 81% and 84% of active managers respectively failed to do so.
The South African performers
Nathan adds that in South Africa the ‘fail’ number was 75%.
Nathan says that local fund managers argue that the South African market is less efficient and that it is therefore easier to outperform. The SPIVA results refute this.
Editor’s Thoughts:
Listening to customer feedback and responding to it is probably the best way to work towards achieving alpha. Clients are becoming more educated and are not scared to seek advice from the internet. Work with clients to achieve alpha. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected]
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