We recently attended a Coronation Asset Management presentation, which included a slide that was both alarming and sad. It showed how clients, advisers and multi-managers have destroyed value needlessly and appear to repeat their behaviour regularly. There are important lessons to learn for both you, the client, and us, your professional adviser.
The graph below shows the flows into and out of investment funds, overlaid with the performance of the funds. The lesson is simple: the money follows performance. When a fund does well, everyone wants in, and when it underperforms people disinvest and capitulate at the wrong moment.
History shows that when you invest in a fund after it has had a good run, it has generally not been a good time to buy. Asset management is about good ideas and making great asset allocation calls and stock selection. When a manager’s fund has done well, generally their stock selections have come off. The manager needs to continue looking for other opportunities to buy. It is difficult to continue getting it consistently right.
When a good fund manager underperforms, this often means that their ideas have not come off yet. All managers will go through periods where they have identified opportunities and have positioned the fund to take advantage, but they haven’t crystallised yet.
Devastatingly, clients and advisers and multi-managers can be impatient and sell the funds at that point. They typically buy the fund that has just done well, and as the performance lulls they become impatient and sell to buy the next best performing fund. They continue ‘chasing performance’ and the destruction of value in this process is often unforeseen, but it is very real.
We saw this in late 2015 when we were all fixated with the firing of finance minister Nhlanhla Nene and the subsequent crashing rand. What many people missed was that all emerging market currencies and stock markets had crashed. Russia and Brazil had been downgraded by the international ratings agencies and hit junk status. Coronation has an Emerging Markets fund and it had given spectacular returns up to that point. Money had flowed into the fund, and they invested into Russian and Brazilian companies. When the fund returned a negative return, the investors panicked. Many investors sold at that point, realising their loss. Of course, a year later the fund bounced back spectacularly.
You may think that you as an individual would act rationally and not sell at that point, but when there are dramatic market events taking place the urge to act is very difficult to deal with.
When we hear that other people are doing well and getting a material gain, we also want that feeling of success. We want to avoid the pain or embarrassment of saying you didn’t act.
To use a sailing term, in the last three years we have been in the doldrums. No wind and flat seas. It is not dangerous for now, but we have not made much headway. You will feel the frustration that sitting in the doldrums has built within you. You want to do something.
The reality is that as time passes more opportunities are emerging for asset managers. Investors capitulate and opt for a money market return. These money market investors will sleep well, but when the wind comes back it happens quickly and they will miss the unexpected large return.
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