We have all been there, looking at the fund you invested in and thinking by yourself, “I’m so disappointed with my returns, I should have invested with Manager X, they had the best performance over the last year and my portfolio would have been worth so much more!”
The fact of the matter is, switching from your current manager to the best performing manager over the previous period might be one of the worst financial mistakes you make. Why? You’ve probably seen the fine print on the bottom of many fund fact sheets (or minimum disclosure documents as they are now called) stating the following: “Past performance is no guarantee of future results”.
Fund or Asset Managers, like any business or economy, go through cycles where they perform well and other times where they perform poorly, sometimes even over multiple time periods! This may be due to a couple of reasons. Different managers have different allocations to different sectors of the economy. As the table below illustrates, performance of different sectors or asset classes rarely have the same returns from one period to the next when compared to their counterparts.
Thus, a manager (let’s call him/her Manager X) who has a higher exposure to a certain asset class, like SA Equity during 2017, would likely have outperformed most of their competition during that period. If you look closely, however, during 2018 SA Equity underperformed most other asset classes, hence, Manager X who did so well during 2017 would have performed poorly in 2018 if they kept their asset allocation unchanged. More importantly, however, should your personal portfolio not have performed well in 2017 and you made the decision to switch your portfolio to Manager X, you would not onlyhave lost out on the excellent performance during 2017 but you would have also (catastrophically) captured all of the underperformance in 2018, leaving you in a worse off position than you would probably have been if you stuck with your current manager. The figure below illustrates the effect over several managers and time periods.
As the table above shows, just because one manager does well during a certain year does not necessarily mean that they will do well going forward.
So, what should I do?
It is always good practice in the investment world to always diversify your portfolio over a couple of managers and asset classes. This is one of the main benefits of a multi – management strategy. A multi-management strategy is based on the age-old wisdom of not investing all your eggs in one basket. Multi-managers specialise in constructing portfolios using several different specialist asset managers and combine these appropriately into one composite multi-manager portfolio. By spreading your investment across a number of asset managers, multi-managers reduce the risk that investors who invest solely with one asset manager are exposed to as we illustrated above.
If you are interested in funds that specialise in a multi-management strategy, look at the Quantum fund range on our website www.quantumwealth.co.za
Should you have any questions or comments, contact one of our professional financial advisors at firstname.lastname@example.org or give us a call on (012) 346 0084