Investment insights

Is your trust in your investment manager well placed?

It has been a volatile six months in the markets, following a five-year period of disappointing equity returns. At times like these, it is understandable for investors to question both their investments and their investment manager. Nomi Bodlani and Tamryn Lamb discuss key considerations when evaluating your investment manager. 

Trust implies a hoped-for outcome. When an investor entrusts an active investment manager with their hard-earned money, they are essentially expressing their confidence in the manager’s ability to deliver performance relative to the objectives of their investment. Typically, these objectives will include both focusing on protecting capital and delivering returns in excess of those generated by a comparable investment alternative, i.e. the benchmark. 

A common saying in the investment industry is that performance does not come in a straight line. Of course, while this may be true, it does not make it easier to bear those inevitable periods when performance disappoints – on an absolute basis or relative to other managers or benchmarks. How do you retain trust and confidence in your manager over the full life cycle of your investment? 

To gain clarity, we would want our clients to consider the following two questions, which we also believe are broadly applicable to any investment manager you choose to place your trust in: 

  1. What are you trusting your manager to do?
  2. How do you know if you can trust your manager to deliver on your expectations? 

What are you trusting your manager to do?

Once you have established your personal goals and objectives, before committing to any new investment, you should ensure you are clear on what you expect from both your chosen manager and your fund. Your expectations of your fund should be directly informed by the stated objectives of the fund. 

Every fund has a minimum disclosure document or fund factsheet. This document contains key information about the fund, including its mandate and objective. Typically, this objective will detail the fund’s benchmark, time horizon and risk positioning.

before committing to any new investment, you should ensure you are clear on what you expect from both your chosen manager and your fund

Let’s take a look at the Allan Gray Balanced Fund as an example: 

The Fund aims to create long-term wealth for investors within the constraints governing retirement funds. It aims to outperform the average return of similar funds without assuming any more risk. The Fund’s benchmark is the market value-weighted average return of funds in the South African - Multi Asset - High Equity category (excluding Allan Gray funds). 

The following information from the Balanced Fund’s objective will help you to identify what to expect: 

How do you know if you can trust your manager to deliver?

Let’s say your favourite sporting team won the title in 2019. No matter how much you wish and hope they replicate this result in 2020, you have no guarantee that they will. However, there are certain inputs they can replicate which they know have been successful in the past: selection, training, nutrition, and so on. So even though they can’t guarantee the result, they can be consistent in their previously successful inputs and trust that they will deliver the best possible outcome, as they have in the past. 

Likewise, we at Allan Gray lean heavily on our experience of investing on behalf of South Africans since 1974. In investments, performance is the outcome. For this reason, rather than evaluating performance on its own, there is merit in evaluating our commitment to the inputs – the “engine” – that produce this performance, specifically our philosophy, investment processes and people.

In investments, performance is the outcome. For this reason, rather than evaluating performance on its own, there is merit in evaluating our commitment to the inputs … that produce this performance

Another key element of trust is alignment of interests. We think clients should ask whether the investment manager itself is structured to prioritise client outcomes and interests. Investors often focus their evaluations exclusively on the investment process, but we believe a company’s structure and ownership are also critical. 

We all know that self-interest is an inherent survival mechanism. It is therefore important that an investment manager’s organisational structure is designed to ensure real alignment between its interests and those of its clients. 

At Allan Gray, the economics of the business are directly linked to client outcomes by charging performance-related fees. When fund performance is below the benchmark (underperformance), investors are charged less, and when performance is above the benchmark (outperformance), investors are charged more. In addition, we aim to remunerate senior staff in a way that encourages them to behave like owners, rather than managers. These individuals participate in the profits of the firm via long-term ownership schemes, rather than short-term bonuses. This directly links their incentives to clients’ investment outcomes, and avoids short-termism in investment decisions. In short, employees and the company only do well if clients do well – which is just as it should be. 

Allan Gray is also privately owned, by the philanthropic Allan & Gill Gray Foundation, and will remain so into perpetuity. This private company status is central to effective implementation of our investment philosophy as it allows the team the freedom to prioritise long-term decision-making, designed to maximise client outcomes, over delivering short-term results.

clients should ask whether the investment manager itself is structured to prioritise client outcomes and interests

Can you trust us to deliver on our promise?

Have we retained a consistent investment philosophy and process, implemented by the right people, over the long term, to deliver a track record of outperformance? And has this been done within an organisational structure that aligns your interests with ours? Your answers to these questions should give you the confidence to evaluate whether your trust in us is indeed well placed. 

From our perspective, we do not take lightly the trust you have placed in us to grow your savings. While periods of underperformance can be testing, we hope that our consistent approach and long-term track record will provide the necessary conviction and “proof” points that we can weather the short-term storms and our clients can enjoy the full benefits of what we believe our approach can deliver.

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