Finance: Sa Investment Industry Called to Order
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The South African investment industry needs to be called to order and the first item on the agenda should be ‘simplification’, according to Darron West of Foord Asset Management.
“South African investors are being offered an array of choices so perplexing that intermediation (with its associated costs) has become an industry in itself.”
“The scale of the complexity and superfluous choice is astounding,” says West. “There are over 300 shares listed on the main board of the JSE and over 600 unit trusts from which to choose! What is more, investors are confronted with a barrage of products from endowment policies to retirement annuities that further complicate their choice.”
West feels that there are four aspects of investing that require urgent demystification: the choice of investment product; the role of multi-managers; the role of sector-specific, specialist- and style-based funds; and the role of financial advisors.
“Investment products are really nothing more than conduits,” says West. “Many of them are sold on the basis of a tax benefit, which can be marginal over the long term. Since unit trusts are the building blocks for most of these products, it is worth considering investing solely and directly in unit trusts for the sake of cost-effectiveness and transparency.”
But even the unit trust environment remains unnecessarily complicated, as West continues:
“Multi-managers build portfolios comprised of investments with other asset managers. The value apparent in this approach is in the outsourcing of the selection of good investment managers, and the negotiation of competitive fees. In essence, this philosophy purports to reduce the complexities of too much choice, to the benefit of the investor.”
“However, a cursory glance at a history of three-year unit trust performance statistics shows that, at best, multi-managers are delivering average performance with a modicum of volatility reduction,” says West. “At worst, the performance is reduced to the bottom quartile.”
“The cynical view might be that multi-managers add a layer of intermediation to the investment industry, but with dubious potential for out-performance.”
West takes a hard line on sector, style-specific and specialist equity funds.
“Part of the proliferation of unit trusts over the last decade may be attributable to the rise of specialist, sector-specific and style-specific funds. Once again, in an environment fraught with excess choice, it is hard to argue that offering such funds offers particular benefit to already confused investors.”
West explains that a good general equity fund manager will take advantage of quality investment opportunities offered in all sectors and across all styles. This begs the question why, with the offer of sector- and style-specific funds, investors should be required to make these decisions.
“Over the long term, a good general equity fund is likely to prevail over specialist equity funds because fads will not be followed, the fund will be properly diversified and the investment universe will not be constrained by a specialist mandate. Certainly, there may be times when the specialist and sector funds will outperform even a good general equity fund. Foord argue that such out-performance is unlikely to be consistent, and that investors would do best to harness the power of compounding the consistent returns of a reputable, well-managed general equity fund.”
Finally, West considers the role of financial advisors:
“Financial advisors are an oft-maligned segment of the investment industry,” says West. “The real value of these professionals is in assisting investors with the requisite planning of their financial affairs and to give guidance for the maintenance of financial discipline. The fraternity of financial advisors has itself begun to question the remuneration model for such services. Many have argued that it is more appropriate, and indeed simpler, for investors to pay a time-based fee to a financial advisor for services rendered, in much the same way as one would pay other professionals such as doctors, lawyers and accountants.”
“Financial advisors surely also find themselves confounded by the sheer complexity of, and prolific choices in the investment industry. Indeed, sector- and style-specific funds may induce some to take on an active role in asset and sector allocation, which, it could be argued, is a role best fulfilled by a fund manager.”
“The investment industry needs to have a simpler, more compelling offer to investors. If the industry won’t do this for investors, then investors need to do it for themselves.”
West explains how:
“Firstly, seek astute financial planning advice, but negotiate a suitable fee. As you would with any other professional, consider the advice given carefully and be sure to research and understand the recommendations.
“While you may choose to engage a financial planner further to implement a plan, you may do well to consider implementing the recommendations yourself (with the associated cost savings) by investing directly with reputable asset managers.
“Secondly, always select an asset manager with a consistent long term record of excellent performance,” advises West. “This act will most likely reduce the array of choice considerably.
“Thirdly, where your financial plan requires that you spread your investments across asset classes (such as equities, bonds, property and cash), consider investing directly in a flexible asset allocation fund, where a skilled asset manager uses his or her discretion to make such allocations for you.”
Finally, West cautions investors to be aware of, and enquire about, the various layers of fees that are charged against their investments. “By minimizing costs, you can add to your wealth materially over the long term.”
West concludes summarily: “An asset manager with a long term track record of consistently excellent investment performance who provides a deliberately limited suite of funds offers a combination of skill and simplicity that should be most compelling to investors.”
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