INVESTING involves doing extensive research on your desired stock picks. Most people however do not have the time (or the expertise) to do this. Whether you are an institutional investor such as a pension fund, insurance company, or a personal investor, you will need a professional investor to invest your funds for you — an asset manager. But how should you approach the decision of selecting which asset manager should be investing your money? The asset manager will do the hard work and research of analysing stocks and attending company investor presentations but you should do the research on the asset manager. There are not many asset managers in Zimbabwe so basically you are not spoilt for choice. Nonetheless this article will shed more light on how to choose the right one.
“Past performance is not a guide to future returns. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.”
This is a phrase that every asset manager places in the small print of their magazines and promotional literature. One might think that they are trying to protect themselves for the inevitable occasional low returns by saying, “hey we warned you that this may happen”. However, it is true that past performance is not necessarily a guide to future performance. It is surprising therefore how many ‘investors’ base their asset manager selection on this one criterion. Following the crowd straight to a rock star investor, without understanding the source of their greatness is a sure way to set yourself up for disappointment. Despite this, there still is a need to look at the track record of the asset manager before making the decision to invest with them.
Who is in charge?
Some funds are managed by one star manager. A global example is Neil Woodford who was once at Invesco Perpetual in the UK. When Neil left the company in 2013, investors made an exodus of over £2,5 billion out of the company. While this does not necessarily mean that you should not invest in funds run essentially by one person, you need to think of what will happen when the ‘main actor’ leaves the show. Take a second to imagine your favourite TV show. Now imagine that same show without the main actor. Not the same anymore is it?
It is much safer to invest with asset managers where the investment process involves teamwork where every member contributes to the common good of selecting the best investments. In the world of Enterprise Risk Management, this is called ‘key man risk’. This is the risk that a business will suffer adversely, after the departure or death of a pivotal figure in the organisation.
Generally speaking, very large funds sometimes cannot invest in their best strategies and end up putting your money into ‘not so good’ investments. Smaller funds generally do not have this problem. However, larger funds do have the financial muscle to vote in shareholder referendums. Some say there is safety in numbers, but the story of the Titanic for example, forces one not to subscribe to this view — flexibility (especially that offered by boutique fund houses) is a much sought after quality in an asset manager.
Some asset managers adopt a top down approach to investing. This involves taking a look at the economy (and the global economy) plus other macroeconomic factors to predict the ways in which industries will be affected and finally what the end effect will be on a particular company’s share price. This investment style works but whether it works in Zimbabwe is a topic of much debate. This week the price of crude oil traded below US$30 per barrel and one can argue that the ordinary Zimbabwean driver has not benefited as much from the free fall in oil prices. The recent reduction in the crude oil price was equated to a world-wide financial stimulus of over US$1,5 trillion. I wonder how much of this stimulus was felt in Zimbabwe.
Others employ a bottom up approach of observing the trends in demand and any developments in the supply and distribution chain to determine how this will affect the income generation capacity of the company. I believe that both methods get the job done and it might be even better to take a holistic approach of adopting both views to arrive at a fully informed investment decision.
While on the topic of investment style, I should point out two types of investors; the value investor and the growth investor. Value investors will seek for companies that have a low price:earnings ratio — shares which offer high dividends in relation to the price. A growth investor on the other hand will look for companies with attractive growth prospects. These are shares with high price:earnings ratios. Growth investors tend to do exceptionally well when markets are rising while value investors tend to fare well when markets are falling. Whatever investment philosophy you subscribe to, it is generally important that the asset manager does not change investment styles.
But how do you check if an asset manager is not a chameleon
Turnover: In the business of selling goods, turnover means the level of sales. In investing, turnover is a measure of how much the asset manager buys and sells shares. Low turnover ratios are a sign that the asset manager is buying shares and sticking to their strategy — this is also good since it lowers dealing costs. But some market events call for asset managers to increase their stock turnover to lock-in quick returns.
Concentration of stocks
Diversification is good. But for a professional investor to hold every stock on the market is strange — unless they are aiming to match a stock index. In particular, if an asset manager claims that they keep a focused portfolio, then you would surely not expect them to hold more than 45 percent of the stocks offered on the Stock Exchange.
Over and above the few points above, you must consider asset management fees. I am a strong advocate for performance related remuneration since I believe that one must be incentivised to do their best by all means possible. However, many asset management fees in this country charge flat rate fees, and you must take these into consideration before placing your money with them.
Thomas Sithole is an Actuarial Analyst and the Head of Enterprise Risk Management (ERM) Solutions at Bluecroft Actuarial Solutions. He is a columnist on the Financial Gazette’s website. If you have any comments or questions concerning any of the matters discussed on this platform, please do contact him on firstname.lastname@example.org or his twitter handle @ZimboActuary.
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