Why to leave your investment decisions to the professionals

The past five years have been marked by abnormal investment markets. To promote economic stimulus in the wake of the financial crisis, central banks in developed countries have made significant monetary injections into their economies. Globally, interest rates hit record lows. At the same time, South African equities – sheltered from the brunt of the crisis – hit all-time highs.

But times are changing. The South African Reserve Bank, along with several other central banks, has started to increase interest rates. Developed countries are on the path to economic recovery, diverting capital flows from developing countries such as our own.

It is clear when looking at what lies in store that markets are unlikely to behave as they have in the recent past.

How then to invest? In this uncertain environment, how do you make your unit trust selections?

You might start by looking at those currently ranked as top performers. By picking the best of the bunch, you may hope to replicate these returns. However, this is unlikely to be the most solid basis for your decision. Asset managers or unit trusts that performed best in the prevailing environment may not be suited to changing economic conditions. In addition, previous performance may not be your most reliable deciding factor under any conditions.

Credit rating agency Standard & Poor’s most recent "Persistence Scorecard”, which tracks how consistently unit trusts in the USA rank as top performers, has shown that less than 10% of the unit trusts classified as top-tier performers in September 2011 retained this standing in September 2013. The reality is that regardless of how good an asset manager is, no single asset manager can top performance rankings all of the time – and especially not when economic conditions are expected to change significantly.

If would follow that your research would need to be more in-depth. You may therefore take a look at the asset managers you know and the unit trusts they offer to evaluate which may be suited to your objectives. However, a detailed comparison between asset managers – taking into account management styles, investment philosophies and relative strengths or weaknesses – can be a daunting and time consuming exercise. Determining which unit trusts would work best in combination, given expected economic developments, may also be difficult. In addition, most investors are unlikely to include allavailable asset managers in their analyses, and opportunities may be missed.

For this reason, it is recommended that investors without the time or know-how to actively manage their investments independently seek the advice of a qualified financial intermediary. However, with over 1,000 unit trusts currently on offer in South Africa, it is understandable if even intermediaries at times feel overwhelmed by choice!

An effective solution may be to invest with a multi-manager. Multi-managers monitor the performance of all available single asset managers on a continuous basis. In addition, they spend considerable energy understanding the qualitative differences between these asset managers. Multi-managers will then determine which unit trusts from which single asset managers to combine, to benefit a portfolio from an overall perspective given expected investment conditions.

A multi-managed unit trust is therefore made up of a complementary mix of single asset managers. This offers two distinct advantages. Firstly, it results in moderated levels of risk. By combining various asset managers, an investor stands to benefit from diversification not only across asset classes but also across different investment processes and views. Such a strategy allows, for example, a manager who performs best in a climbing market to be complemented by a manager who is defensively positioned to offer better protection when markets fall. It also removes the reliance on any single asset manager to achieve an investor’s objectives on its own.

Secondly, a multi-managed unit trust has the potential to offer more consistent performance. Any single asset manager will typically experience downswings in performance when market conditions don’t favour their particular approach. By combining different asset managers with different investment tactics, these downswings in performance can be smoothed out.

It is highly unlikely that the next five years will be similar to the last. South African equities are now overvalued, and interest rates are likely to increase further. In such circumstances, unless you have sophisticated knowledge, outsourcing your investment decisions to a multi-manager makes more sense than ever. By investing with a well-respected multi-manager, your research is done for you – and will likely be executed more comprehensively than you may be able to.

So, when making your investment choices, why not let the professionals do the choosing for you?