Inside the head of an asset manager

2014-03-23 14:00

Choosing shares for your portfolio can be a daunting task. How do you know which share to buy and when to sell it? Neesa Moodley-Isaacs asks a few asset managers how they make their choices on behalf of their clients

When selecting a share, asset managers were unanimous in their opinion that the share had to

show value to be selected as part of an investment portfolio.

As Linda Eedes, a senior analyst at RECM, puts it: “We like to buy businesses when they are on sale.” This is also known as value investing, where asset managers look at companies trading below their value and considered “cheap”. According to Eedes, RECM prefers to buy high-quality businesses at cheap prices.

“This helps us reduce the chance of suffering losses. A cheap asset has a high buffer between the value and price to cater for the possibility of our analysis being wrong, and a good-quality business can grow its intrinsic value over time, protecting investors if you have paid too high a price by mistake,” she explains.

If you look at the performance of different unit trust funds, only a few managers consistently outperform the index or the benchmark for that fund.

While it is not unusual for a fund manager to outperform the index over the short term, this is usually considered more luck than skill.

This is why you should look at the long-term performance of a fund over at least three to five years rather than investing in a fund based on its performance over a single year.

Eedes says managers who have demonstrated the ability to outperform the market through good and bad cycles do so primarily by exploiting inefficiencies in the market.

“The market tends to overprice popular businesses and underprice businesses going through difficult times,” she points out. This provides opportunities for an astute and disciplined investor, assuming you have a long enough investment horizon to withstand short-term volatility and to recoup your losses over time.

According to Feroz Basa, a fund manager at Old Mutual Investment Group’s Electus boutique, share price performance over the long term is highly correlated to the earnings of a company.

“So, companies that grow their earnings over the long term, or faster than the market, by default tend to have shares that outperform the market,” says Basa.

But Duane Cable, the head of South African equities at Coronation Fund Managers, points out there is a differentiation to be made between a winning share and a winning business.

A winning business generally has good management, strong capital reserves and generates high returns on the capital employed. But if you pay too high a price for shares in this business, they are not a great buy. “Winning shares are generally those that can be bought for less than their intrinsic value,” says Cable.

All three asset managers agree a long-term view of at least five years should be taken when choosing shares for an investment portfolio.

According to Eedes, underperformance is most often the result of inconsistent decisions or a result of trying to “time the market”. Having a longer investment horizon is a huge advantage as it allows you the best chance to take advantage of mispricing in the market.

She says: “For a high-quality business to be cheap, it is generally going through a difficult time. Unfortunately, high-quality businesses just don’t trade at low prices when everything is going well. As such, there is often negative news surrounding the share, which can lead to further short-term volatility and downside.”

If you are focused on short-term performance, you may not choose to invest as a result. But an investor with a longer investment outlook is able to buy the business at these very low levels and sit tight, and if they are correct about what it is ultimately worth, will enjoy a handsome return as reward.

Reasons an asset manager will sell or kill a share:

.?When the share price is the same as the valuation, so it is no longer “cheap”;

.?If the asset manager believes it has made a mistake in its valuation or assessment of the business’ quality;

.?If a substantially cheaper opportunity to buy a different share presents itself; or

.?The release of new information that shows there has been deterioration in the fundamental value of the business. This will typically happen when companies release their financial results or issue a trading statement.

Join the conversation! encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions. publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Inside News24


Book flights

Compare, Book, Fly

Traffic Alerts
There are new stories on the homepage. Click here to see them.


Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.

Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire network.


Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.

Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.