Uncategorized 24.4.2014 07:00 am

Getting the most out of the best

Image courtesy stock.xchnge (KillR-B)

Image courtesy stock.xchnge (KillR-B)

More than 1 000 collective investment schemes vie for investor attention in South Africa.

That includes 177 South African equity general funds, 71 interest bearing funds, 37 South African real estate funds, and 32 global general equity funds.

For an individual investor, the thought of trying to select the right funds from this universe can seem onerous.

A solution, particularly for those who might not have a lot of money, is to use multi-manager funds. By doing this, an investor outsources the asset allocation and fund selection decisions to the fund-of-funds manager who is effectively acting as an intermediary for all of his or her clients.

“There’s just been such a proliferation of unit trusts that it’s not practically possible for a retail investor to be an expert on all of them,” explains Adriaan Pask, the chief investment officer at PSG Wealth.

Diversification

They key philosophy behind the multi-manager approach is diversification. The fund-of-funds manager aims to blend different investments together to create a balanced portfolio that should have lower, short-term volatility than with a single manager approach.

This can be done in a single asset class, such as equities, but is most powerful when done across asset classes. That is because the multi-manager is able to first make an asset selection and then identify the fund or funds best suited to capturing returns from that sector.

“Given the desire to blend portfolios and given the proliferation of unit trusts, a need was created to diversify not just across asset classes, but across managers as well.”

Importantly, multi-management gives an investor the benefit of being exposed to the views and performances of a number of different investment houses. That not only reduces risk, but also enhances opportunity,” Pask says.

“Everybody can’t be good at everything,” explains Fatima Vawda, the managing director of 27Four Investment Managers. “So a multi-manager approach gives us the advantage to use the best in every asset class. We can choose the cream of the crop.”

Top down and bottom up

The best multi-managers are those who recognise the advantage in combining expertise.

Bruce Stewart, who manages the Stewart Maco Equity FoF, wanted to ensure the best market exposure for his clients. The fund-of-funds approach gives him that opportunity.

Successful multi-managers will generally be those who take a top-down view of the investment world and can identify the best managers, asset, sector or style mix for their clients.

“You want to mix uncorrelated asset classes together,” 27Four’s Vawda says. “And once you’ve done that at the asset-allocation level, you can do the same thing at manager level.

“There are lots of ways to diversify within equity, for example, such as style, sector and size bias,” Vawda explains.

“And these work differently during different market cycles. For instance momentum-driven strategies work well during an expansionary growth phase, and if at that point you’re sitting with 100% assets in a value manager, you are going to struggle. So you want to create a style mix. You don’t put all of your eggs in one basket.”

Costs

The biggest concern investors have when looking at multi-manager funds is cost. This is because funds-of-funds inevitably create an extra layer of fees. You have to pay fees to the multi-manager as well as to all of the underlying fund managers.

But that doesn’t mean that all multi-manager funds are expensive; you can keep down costs by negotiating lower fees.

The 27Four Balanced Prescient FoF, for example, comes at a TER of just 0.87%. That makes it one of the cheapest multi-asset funds in the market.

There’s also a cost benefit because the fund manager can switch between investments without incurring capital gains tax.

 

 

 

 

 

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