31 May 2017
INVESTING 23
ANDRIETTE THERON Senior Investments Analyst , PPS Investments
Why manager diversification is important
UK election has economic implications
It is widely accepted that portfolios should be diversified across securities , asset classes and geographies to include many uncorrelated sources of returns and minimise the impact of short term volatility of any of these factors .
Manager-specific risk is probably the most unappreciated diversifiable risk that investors face . As a multi-manager , we provide investors with that additional layer of diversification by combining asset managers with different but complementary investment strategies .
But why not simply invest in the top-performing manager ? The simple answer is that the topperforming manager is highly unlikely to be the best performer all the time .
The asset manager ranking table clearly shows just how volatile and unpredictable the relative returns of asset managers are over the short term . Each colour represents one of the largest asset managers in South Africa , while each column represents the relative ranking of the managers in each calendar year since we launched the business . We can see from the random distribution of colours , that it is indeed impossible to predict with any confidence which the best-performing manager will be over the next 12-month period , purely based on performance over the most recent 12-month period .
An investor that allocated capital to Manager A based on strong performance in 2008 would have been disappointed by poor relative performance during 2009 and 2010 . If the investor capitulated in 2011 and switched out of the strategy in search of better returns , the investor would have missed out on the strong performance delivered by Manager A during the year . It does not matter when the investor made the initial investment ( whether it is 2008 , 2011 or 2013 ), the pattern repeats itself . Part of the reason for this variability , is that investment strategies perform differently during various market and economic environments . Each asset manager has a fairly unique approach to investing that gives rise to managerspecific risk . An asset manager ’ s investment strategy does not only determine how an investment idea pertaining to a security or asset class level is evaluated ( e . g . focus on earnings growth , quality of management , providing sufficient margin of safety etc .), but also the weight it could carry in the portfolio ( extent to which the manager is willing to allocate to the idea ). As a result , different asset managers could have very different views or positions on the same investment with the same information at hand .
When we launched the business in mid-2007 , little did we know that we were about to face the worst financial crisis since World War II . Almost a decade later , investors are still dealing with the after effects of extremely accommodative monetary policies across most of the developed world . How asset managers were positioned to take advantage of the events that transpired over the past decade depended on the managers ’ investment strategy .
For example , a value-orientated manager had to live with severe underperformance for lengthy periods of time as already cheap resource counters continued to underperform expensive multi-national industrial companies with better earnings visibility and attractive dividend prospects , in a low-yield environment . A benchmark-focused manager , whose process is designed to establish positions in relative terms ( underweight versus overweight ), typically benefited more than a benchmark indifferent manager from the phenomenal growth of Naspers into a R1 trillion establishment , as the share became a significant holding in the Shareholder Weighted Index ( from 1.6 % a decade ago to 18.6 % at quarter end ). The extent to which fixed income investors were affected by the write-down of African Bank debt in 2014 was a function of the managers ’ ability to appropriately assess the underlying credit risk and willingness to move down the capital structure for additional yield pick-up .
The UK Government ’ s decision to hold an early general election in June has some potentially significant economic implications . This is according to UK think-tank , The Centre for Economics and Business Research ( CEBR ).
On the upside , an increased Tory majority , which would almost certainly be the result of an election , will increase economic and policy stability and reduce the current sense of business uncertainty .
“ The Government ’ s majority is thin at present and introducing unpalatable policies over the coming years would be difficult without more Tories in Parliament . Increased certainty should feed through into higher levels of business investment , supporting growth in the short term .
“ This is especially the case with respect to Brexit uncertainty , where Theresa May would have to lay out a more articulated vision to the electorate in the run up to the election .”
The CEBR says a colossal defeat for Labour , with the ousting of Jeremy Corbyn , “ would also allow a credible opposition party to emerge from the ashes and end the effective one party state that the UK has become .”
“ This can only be good for the economy . Just as competition leads to better outcomes in business , so too does competition in politics , with credible political parties competing to deliver the policies which best guarantee prosperity for the nation .”
There are , however , some economic downsides to an early general election and a larger Tory majority , the CEBR notes .
“ While the Government increasingly seems to be taking a more moderate ( and economically sensible ) stance on issues such as immigration , reflecting the realpolitik and need for pragmatism post-Brexit , this could unravel .
“ Hardliners within the Conservatives could give Theresa May a difficult time over any softening in stance towards Europe . And she could be pushed into taking a hardline stance by the media during the election campaign – expect her to be repeatedly challenged on how and to what extent the Tories will reduce immigration .”
According to the CEBR , the politics of Theresa May is markedly different to the metropolitan liberalism of David Cameron and George Osborne .
“ It is more parochial and more anti-business . There is a risk that , with a bigger majority , she introduces policies which are detrimental to entrepreneurship – from higher taxation to migration restrictions .
“ This would be the wrong set of policies during an era in which being internationally competitive and attractive are so important .”