Treat financial services league tables with caution
21st Century man is obsessed with measuring things. We rank our sports teams on the outcome of matches, political parties on the number of votes they receive during elections and fund managers on their portfolio returns over a given period of time. But th
Joe Average loves investing his discretionary capital in last year’s best performing unit trust fund, while pension fund trustees are often swayed by industry surveys of large asset managers. One of the surveys they rely upon to guide investment decisions is the Alexander Forbes Manager Watch ™ Survey of Retirement Fund Investment Managers. The group released their December 2011 (up to date to 30 June 2011) research to the media at a press conference held in Johannesburg recently. The Manager Watch survey offers a bundle of 13 separate surveys encompassing 45 managers and 320 funds. Prerequisites for inclusion in the survey are assets under management of R200 million (or more) and a minimum 12-month performance track record. Some of the categories are: SA Manager Watch Balanced Mandates, SA Equity Manager Watch, SA Bond Manager Watch and SA Money Manager Watch. Thus the publication covers each and every asset class open to local fund managers.
An obsession with performance lists
The first ranking table in the Manager Watch is of the Top 20 Asset Managers by assets under management. This table affords readers an interesting overview of the domestic asset management environment, which topped R2.795 trillion at 30 June 2011. (Alexander Forbes reports that assets under management have grown at 13% per annum compound since 2000, when the tally stood at R800 billion). South Africa’s largest (by AUM) asset manager is Old Mutual Investment Group SA with R458.197 billion, followed by StanLib Asset Management (R338.184 billion) and Sanlam Investment Management (R332.398 billion). The group’s in fourth and fifth position – Investec Asset Management and Allan Gray Limited – each manage more than R300 billion too. Rounding out the Top 20 is Foord Asset Management with R35.563 billion.
Alexander Forbes’ survey provides reams of information across the asset manager categories listed above. We’ll drill down into the SA Equity Manager Watch survey to find out more about the detail supplied. The departure point is the objective of the fund in question: “The portfolios included represent specialist equity funds which are actively managed to various benchmarks…” The range of returns in this universe, to 31 December 2011 were between -1.71% and 12.21% over 12-months, 13.42% and 22.48% per annum over three years and 6.68% and 15.45% per annum over five years. All returns are gross of fees.
The survey ranks 63 specialist equity funds using active returns (or a fund’s return minus its benchmark) and on one, three and five-year performances. Based on five-year active returns Absa Asset Management Value (+7.37% per annum), Coronation Aggressive Equity (+4.15%) and Foord Asset Management (+3.57%) occupied the top three slots… But if we look at one year performances the top three change to Omigsa Premium Equity (+7.96%), Allan Gray (+6.14%) and Foord Asset Management (+5.53%).
On investment decisions and information overload
What should pension fund trustees and other large institutional investors “take” from these surveys? There is a huge risk that institutional decision makers direct their funds’ capital to so-called “first quartile performers” in each investment category. But a narrow investment view built around asset manager performance is wholly inappropriate. “These surveys only provide a platform for asset managers to display returns in a simple and credible way,” comments Alexander Forbes. “A manager evaluation should not be conducted in isolation, but rather with a clear understanding of the weaknesses that any data source brings to the table.”
Financial industry stakeholders have long realised that investors, trustees and consultants might be using manager performance surveys incorrectly. For this reason Alexander Forbes’ latest Manager Watch publication includes a section titled An Objective Look at Surveys. The group outlines the numerous “critical caveats” survey readers should be aware of. At the outset they warn of certain challenges inherent in all financial performance surveys such as time frame, diversification and the uniqueness of asset managers among others. We briefly consider some of their observations below.
Things to consider before making performance-based decisions
Pension fund managers should, as a first step, consider survey performance rankings against the time frame of their investments and their portfolio diversification. “The greatest limitation of surveys is that they only look at how one manager’s performance compares to another’s over a specified time frame,” notes Alexander Forbes. A pension fund needs to diversify risk and ensure manager stability, and cannot afford to chop and change managers based on one-year performance. And a pension fund that chooses all of its asset managers from the top quartile of performers is at serious risk of choosing managers with similar strategies...
There are many factors that can result in seemingly similar investment strategies producing different results. Before choosing one manager over another, based on performance fees, pension fund trustees should consider the following:
· The differences in mandated strategic asset allocations (including cash requirements for liquidity).
· Differences in how risk management is defined for the mandate (is the manager preserving capital, tracking a benchmark, or controlling absolute volatility, for example).
· The time frame required for a specific strategy to reflect its performance potential (it makes no sense to dump a fund with heavy private equity commitments after one year when its return timeframe is five to 10 years).
· The underlying benchmarks or performance targets specified in the mandate (asset managers could have different benchmarks despite inclusion in the same segment of a survey).
· Changes in the underlying manager over the term of the performance data
· Multiple manager funds versus single manager funds provide no viable point of comparison.
· Performances reflected gross of fees versus those reported net of fees.
Given the multitude factors that render “return only” comparison of asset managers useless we urge pension fund trustees and other institutional investment decision makers to take Alexander Forbes’ advice: “Ideally, analyses needs to be done through different market environments, using a number of different sources and advice, before a fair assessment of strengths and weaknesses can be made…”
Editor’s thoughts: As we paged through the latest Alexander Forbes Manager Watch ™ Survey we were grateful that we do not have to make investment decisions involving hundreds of millions of rand in pensioner savings. There is so much data – and the rankings are virtually meaningless! Do you sit on a pension fund board of trustees? And does your board make investment decisions based solely on asset manager return surveys? Add your comment below, or send it to [email protected]
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