Schalk Louw looks at what the world's large investment houses are predicting for this year.
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In any professional team sport, it’s interesting to note that the most successful teams seem to repeat their successes over the years.
Take rugby, where teams like the Springboks or All Blacks occupy the top rankings every few years - or motorsport, where brands like Ferrari, Mercedes or Red Bull rarely take a back seat.
Many readers may be quick to point out that the pockets funding these teams’ successes run deep, and if the richer Currie Cup teams didn’t buy all the good Cheetahs players every year, they would actually dominate the tournament.
I won’t argue with that. But the truth is that these successful teams were built through hard work over many years and became financially stronger, which placed them in a position to afford better management, support, resources, and players.
Does winning one tournament guarantee you another win next year? Absolutely not. As an avid WP and Ferrari supporter, I have learnt this the hard way over many years.
Like sports teams, well-known investment management teams have, through years of success, built solid management teams, gained tremendous support and optimised their resources. It’s unlikely that any two investment companies will follow the exact same strategy, and the ugly truth is that if one’s strategy isn’t successful in a particular year, they will have some difficulty outperforming their peers and their benchmarks. Good strategies and, more importantly, good processes keep the winning teams on top over the longer-term.
Show me the money
When searching for winning investment managers, I look for qualities shared with any successful sports team: performance, consistency, and to what degree they fail when things don’t go their way.
For me, performance is about one thing: "Show me the money!" as Jerry Maguire famously said in the 1996 film of the same name.
I look at how a particular fund performed over the last three years, five years and ten years.
Note that this shouldn’t form the basis of your decision to choose specific funds. The problem is that last year’s winners don’t always end up on the podium again the following year. To illustrate this, let’s use the Formula 1 Constructor standings over the past 12 years as an example. By looking at the 12-year “returns”, you will see that Red Bull was last year’s winning team and had managed to do so five times over these 12 years. However, they also struggled to keep up with the competition eight times between 2014 and 2021 while Mercedes dominated.
Part of measuring a team’s success is how consistent their monthly performance is. By using the Formula 1 example again, this would be the equivalent of evaluating a team’s performance on a race-by-race basis.
Here, I usually look at a fund’s 10-year monthly return by comparing it to its own benchmark and the performance of its peers. I will, for example, give preference to an equity fund manager that manages to outperform the FTSE/JSE All Share Index 75 times over a 120-month period, over a fund that’s ahead on a three-, five- or 10-year return basis, but only manage to outperform 50 times.
Next, I will examine what a fund does when everything goes wrong. This means that when your "Protea" is no longer in bloom, we have to ensure that it doesn’t completely wither and die. Accordingly, I compare fund managers’ volatility, drawdowns, and Sharpe and Sortino ratios. I firmly believe that if a fund manager can manage risk well, it helps to aid a healthy sleep cycle.
Without highlighting any names in particular, I applied this three-point strategy to all SA General Equity funds with a size of R1 billion or more, combined with a return history of at least 10 years.
The graph below clearly illustrates that the average returns of the top 10 funds didn’t only outperform the FTSE/JSE All Share Index over different periods but that they managed to do so consistently.
I took things one step further by consulting the December 2022 minimum disclosure documents (aka fact sheets) of the top 10 funds for the shares that most have in their portfolios
The most-prevalent shares are listed below, with the total number of times they feature in the portfolios of top 10 funds in brackets:
- Anglo American (9 out of 10 funds)
- Implats (7)
- Absa (6)
- BATS (6)
- Naspers (6)
- Sasol (6)
- Standard Bank (6)
- Glencore (5)
- MTN (5)
- FirstRand (4)
- Northam Plats (4)
- Prosus (4)
- Richemont (4)
Personally, I don’t think there are many big surprises left in shares for the time being because. In the same way the top sports teams have proven themselves worthy as champions over the years, so too have the top investment management companies.
However, I would like to emphasise the phrase "over the years" because this highlights the need to keep your emotions at bay, to be patient and invest with a long-term vision, and, most important of all, to diversify your portfolio, as it remains your best investment strategy.
Schalk Louw is a portfolio manager and strategist at PSG Wealth Old Oak.
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