How many managers need to be included in a unit trust portfolio?

How many managers need to be included in a unit trust portfolio?


By David Crosoer and Prieur du Plessis

THE BULK of South African investors’ assets still goes into a few large funds. At the same time, over the past decade, there has been an explosion of funds from which investors can choose.

How then should investors select funds and how many is enough?

The South African unit trust industry has well over 1 000 funds. According to the latest Morningstar Fund Observer, close to a quarter of all unit trust assets are held in the 20 largest funds, and the largest fund is bigger than the combined size of nine of the 15 Asisa categories.

More than half of South African investors’ fund assets is spread across just three Asisa categories, reflecting the important historical role funds have played as a vehicle for retirement savings (in South African MA High category), general SA equity market exposure (South African Equity General), and an alternative to saving through a bank account (South African Interest Bearing [IB] Short-term).

Investor assets are also concentrated in several large asset management companies. According to the same Morningstar survey, there are 44 asset management companies in South Africa, but one third of assets is invested with just three asset management companies, and 24 management companies have fewer assets collectively than the largest single fund.

Why are investors’ assets concentrated in so few funds and across so few strategies, and what makes it so difficult for investors to access different funds that might have different skill sets?

When assessing a manager’s capability, it is important to consider where the manager is likely to perform best.

Typically, one needs an in-depth understanding of each manager to identify how easily its investment edge is transferable across multiple categories, and where its investment skills lie.

When considering managers with less established track records, qualitative judgement becomes even more important as there is less quantitative information to go on.

Sounds too intimidating? Perhaps it’s not surprising that investors tend to overwhelmingly allocate to large funds in well-trodden Asisa categories.

But is manager skill disproportionately distributed in just a couple of Asisa categories and management companies?

For example, there are Asisa categories that are less constrained by pension fund regulation (for example, WW MA Flexible where funds can invest up to 100 percent in equities or foreign markets) or the narrowness of the SA equity market (the Global Equity General category) or by recordlow short-term interest rates (South African IB Variable Term), which are much smaller in size than the three large Asisa categories despite their offering far more investment opportunities.

At the same time, there are asset management companies with robust investment processes and organisational incentives closely aligned with yours, but whose brand may not be well known. How can you incorporate such funds into your portfolio?

Perhaps the starting point is as simple as accepting that good managers are difficult to find, so as investors we may need to be more open-minded about how we access them.

If you are invested much like everybody else and mainly favour funds everyone has heard of, are you going to outperform the average?

Start out by trying to select managers you think have been above average over time. While the past is not necessarily an indication of the future, it can establish whether the managers have previously demonstrated they might have skill.

Try not to focus too much on recent short-term performance (or performance that happened a long time ago), but also consider why the fund might have an enduring edge.

There is no magic number to how many funds to include in an investment portfolio, but most of us probably are under-exploiting the asset manager skill set we could access in our portfolios, especially given how concentrated in relatively few strategies and funds investor assets are today.

While the South African landscape has encouraged asset managers to launch more funds than is necessary, it has also made it harder for investors to identify which funds have an enduring edge.

Increasingly, financial intermediaries are relying on discretionary fund services to help financial intermediaries in their fund selection on investment platforms. These services typically are more diversified by asset managers than aggregate industry data indicates. This is particularly the case if the Discretionary Fund Manager makes use of managers with both specialist and multi-asset skills.

Funds of funds or multi-managed funds can also provide an easy entry to diversified manager portfolios. Here it is important that the multi-manager can explain how it identifies above-average managers and that its track record demonstrates a more consistent performance profile.

Regardless of what you decide to do, make sure you have enough discipline to stick to your investment strategy, as making frequent changes is likely to negatively impact your ability to generate performance over time.

David Crosoer and Prof Prieur du Plessis are Chief Investment Officer of PPS Investments and Chairperson of PPS Multi-Managers respectively; email: [email protected]

*The views expressed here are not necessarily those of IOL or of title sites


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