Creating wealth: lessons from a fable
We all know Aesop's fable about the hare and the tortoise, but Louis Rossouw, Marketing Director of Quantum Wealth has an interesting take on this fable that highlights a number of lessons that asset financial advisers should heed.
In this well-known and favourite fable, the hare understandably backed himself to beat the tortoise in a foot race, and complacently took a nap half way to the finish line. When he woke up he discovered that the slow but steady progress of the tortoise had led to an unlikely victory.
In a world where the brave princes of active management become legends, multi-managers are commonly viewed as ugly ducklings. In my view, Aesop's tortoise is a more appropriate animal metaphor. It personifies a number of the benefits of multi-management, which are discussed below.
Investing is a marathon, not a sprint
The current bull market has outpaced most equity fund managers, and left flexible and prudential mandates even further behind. Research has shown that it is hard for active managers to outperform in rising markets, but that good managers protect on the down side when markets turn bearish. Diversifying across a number of good managers enhances capital protection further – during bear markets, as well as in volatile, sideways-trending markets. Markets do not go up in straight lines forever, and multi-management helps when the going gets tough!
Losing ground
The hare enjoying a siesta after his initial sprint was akin to an investor achieving a 100% return in Year 1, and then losing 50% of his or her capital in Year 2. To merely regain lost ground thus requires another 100% return! The tortoise rather resembles a cautious investor who eked out 20% p.a. over both years and comfortably beat the more volatile performance of his competitor, ending up with a 44% total return. Longer term, consistency matters – perennial Second Quartile performance eventually translates into Top Quartile status.
Success has many sources
The hare's faith in his speed took no account of other qualities needed for long-term success. Similarly, no single asset class or portfolio manager will stay on top forever. Nor will a single management style stay in the sweet spot forever. By diversifying across asset classes and managers, multi-management sacrifices some of the potential short-term upside in order to reduce downside risk. Done scientifically, including different managers with diverse sources of return can actually add alpha over the medium to longer term.
Predictability is not uncool
Many investors, particularly those deriving an income from their investments, can simply not afford fluctuations in performance. The steady progress of a tortoise is not unlike the systematic generation of returns typical of well-diversified portfolios. Most investors are actually far more risk averse than they care to admit during the good times, and when volatility starts biting would gladly sacrifice some upside in return for steady growth.
Expectations matter
Aesop's fabel shoes how incorrect our assumptions can be.Warren Buffett once remarked that the key to a successful marriage lay not in finding the best-looking, richest or most pleasant wife, but rather in marrying a woman with low expectations! Multi-manager products are not suitable for aggressive investors who expect to continually ‘shoot the lights out'. They are, however, ideal for those who understand and accept the logic of steady progress. In this regard financial advisers have a crucial educational role to play.
