Investment insights

Study reveals reliance on recent performance in picking unit trusts

Shaheed Mohamed surveyed more than 400 financial advisers in South Africa to identify attributes that financial advisers in South Africa consider when selecting unit trusts for their clients’ portfolios. While the participants in the study were advisers, its findings are relevant to investors, asset managers and product providers.

There are over 1350 locally registered unit trusts in South Africa. Faced with that level of choice, most investors turn to independent financial advisers (IFAs) to make the decisions for them.

An IFA’s existence in the industry is dependent on him or her offering regulatory-compliant advice; yet there is no regulatory blueprint to aid them in their product selection for clients.

So how do advisers make their choices?

Past performance is just one of several factors financial advisers in South Africa say they consider when it comes to choosing which unit trusts to invest in on behalf of their clients. Along with relative performance of the unit trust (to its peer group), risk measures, and the investment style of the manager, these four top attributes account for only 50% of their overall decision. Responsible investing is at the bottom of the list.

Advisers also report that they consider the qualitative aspects of a fund. Examples of this include a consistent investment philosophy, a sound investment process, and an experienced investment team.

It is pleasing to see that advisers report placing more of an emphasis on longer, meaningful performance periods rather than shorter periods. However, this is not always reflected in behaviour: We have noticed that in different market cycles, the flows into our funds differ. When we analysed advisers’ clients’ actual behaviour using fund flows data relative to performance they tended to allocate money based on recent performance.  Worryingly this sub-optimal investor behaviour was more pronounced among investors in our lower risk Stable Fund than in our Balanced or Equity Funds.

Looking at relative performance, it is surprising that advisers are not more cognisant of the benchmarks rather than the peer groups – different benchmarks and funds are managed differently across categories.

The study further revealed that ‘growth’ is the investment style of choice, followed very closely by ‘value’. Most trust was placed in managers with tenure of more than seven years, holding a CFA qualification. South African advisers also prefer medium-sized funds for their clients’ portfolios – although it is worth noting that performance is not dependent on size.

It is important to note though that, like fund managers, not all advisers are created equal.  Investors should ask the IFA what process is followed when selecting unit trusts for their clients’ portfolios.

Download a summary of the research results

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