Friday, September 18, 2009

It is all about the return

Until we delisted from the find an advisor website, we were annoyed with phone calls from asset managers nearly every week. Excluding the Namibian funds, an investor have close to 700 funds to choose from, according to Morningstar.

The list is available on the Amedco website.

Each fund on the Morningstar list have their year-to-date, 1 month, 3 months, 6 months, 12 months, two year, three years, five years, seven years and ten years respective return published.

The list is further divided between pure equity funds, balanced funds (mostly equities and property, with some bonds and cash), stable funds (slightly less equities and property, with some bonds and increased cash), income funds (which is a mix between bonds and cash), and money market funds (cash only).

Funds are also divided between their investment territory. Local funds can only hold a limited percentage offshore, worldwide funds can invest anywhere, (SA included) and foreign funds exclude South Africa.

Morningstar also publish the benchmarks, mean, volatility, funds size and start date.

Investors in South Africa are obsessed with short term returns. When equity markets perform well, investors flock into these better performing funds in their billions only to herd into low risk and stable funds when it is too late. The result is that investors under perform the benchmark nearly every year.

We consider two benchmarks. Short term investors (less than 24 months before funds are withdrew) need to outperform the inflation rate. CPI now is between 6 - 7%, although many would agree that it is slightly higher, depending on what you measure.

For investors with a two to three year horizon, we argue a return slightly below the long term JSE All Share Index (now at 13,64%) should be acceptable. In other words, an annual return of say 10 - 11% per year should not be frowned upon. This time frame is somewhat of a grey area and sometimes investors need to increase their term if conditions is unfavorable to withdraw. Much like free fall we experience in 2008. For the year to date, equity funds are up 16,57% soothing many a loss.

Long term investors (pension funds and retirement annuities) should outperform the JSE All Share Index. It is possible to invest your pension fund and retirement money in the JSE All Share Index, so why would you appoint and pay an asset manager to do less? The problem is too many funds under perform the index. The return on your individual pension fund should be compared to the index.

The importance of track record
Why would any sane person invest their money in a fund with no track record. I would rather appoint Coronation who produced 16,1% return each year for ten years than say, Discovery, who have no track record at all. Coronation did perform even better than all the Discovery funds over all the periods. Surely they must be given the benefit of the amount.

The problem is that no one empower the investor to make a informed decision. One can only compare the funds if you buy a Personal Finance - and who reads that? Companies with Employee Benefit Schemes as well as individuals are fooled daily to invest in mediocre fund. Funds with no established track record of delivering above average returns.

Oh, and don't forget that your existing pension fund scheme, existing retirement annuity or any investment that you have ever made in your life, can be exposed to these award winning funds.

Since 2004, Amedco invested client funds at South Africa's best asset managers. We will continue to do so, and will not engage in any argument with a new or established fund manager without a proven track record and value investment philosophy - something that others seems not to accept or understand.

The new flavor of the time is fund of funds. Asset managers who package more than one fund into a fund called fund-of-funds. Why would you appoint and pay for someone, if you could do empower yourself? One could also argue that the financial adviser becomes absolute. That is true in the pure sense. Amedco however we provide guidance to the individual combination and will caution you on funds that look good, but might be not so good idea to invest in.

To invest in resources is a great idea, if you can stomach a extreme losses over long periods.

We include therefore the Morningstar performance figures to empower you to compare what you should receive with what you are actually getting - return wise. If your investment falls short of the mark, you need to start asking questions.