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The blind mice

07 May 2004 Angelo Coppola

A stealthy risk lies behind the veneer of success of the performance of certain elite fund management houses within South Africa, says Adrian Clayton, a fund manager at PSG Fund Management.

This is not a risk which many investors consider; it is in fact self-fuelled, driven by those that are ironically most at risk.

In the past few years, the almost uncanny success of a handful of asset management companies has bred a new form of market hysteria, in my opinion, a level of expectation which is unhealthy for investors, the asset management companies in question and potentially unnerving for the industry and market holistically. 

I say this because the extent of market focus on this elite group of managers has turned many investors into blind mice. 

My concerns are as follows:

  • there exists a number of highly talented and successful asset managers in South Africa, but market myopia has led to many of these being ignored and a concentration of assets focused on a few 'elite' managers.
  • many of these elite managers are being forced to change their traditional money managing methods due to the size of investment flows, which those in the know observe, but the investing public do no realise. 

What I mean by this is that the success of these houses historically was based on the ability to buy unwanted companies, often relatively small market cap entities and to wait for the market to re-rate them. 

As an asset manager without enormous quantities of money, this exercise of entry and exit could be undertaken without notice.  It becomes very difficult, if not impossible to effectively achieve the same result when assets under management are enormous. 

In fact, a large asset base often means that the manner of entry into the target company changes from a passive portfolio investment, to an active merchant banking transaction.  This again leads to its own risk. 

  • in order to live up to expectations, created from their own historical superb performance, these managers are being forced to take bigger and bigger bets, with concomitant risk.
  • a massive concentration of monies has occurred within a grouping of shares which could easily result in systemic risk for the JSE if the elite managers begin to underperform. 

Underperformance must not be measured against the sector within which these managers reside, but is also relative to investor expectations, which we all know are ridiculously high. One will only know what the expectations are, when outflows begin.

I could go on forever about this topic, but feel that the above points adequately depict the risks. 

It should be noted that I in no way am attempting to dilute the success of the elite managers. 

Instead, the objective here is to highlight that as investors, we are more than often responsible for our own demise and this time investor greed could once again result in normal wealth destruction, but also tarnish the reputations of investment stars for no fault of their own.

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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