HIGH-VALUE RESOURCES - JSE MAGAZINE

HIGH-VALUE RESOURCES

When growing an investment portfolio, what makes a successful asset manager?

Being successful in today’s ultra-competitive asset management environment is not about being a star manager over the short term. These days, what separates the good from the average manager is the use of sound principles that focus on the investment process over the long term, rather than the outcome. This is according to Peter Linley, who is responsible for the management of SA’s longest-running unit trust, Old Mutual Investors’ Fund, which celebrates its 50th anniversary this month.

‘Anyone can be lucky in the short term,’ says Linley. ‘The real test of a successful manager is one who performs over time. Gone are the days when having a couple of big teams covering the market may have given you an edge.’

Valuation – science and art
Linley believes the bedrock of a sound investment process is disciplined valuation. However, it is also important to acknowledge other proven factors, such as quality, growth and sentiment. ‘Valuation is key, but it is subjective. While we continually revisit and test our base-case assumptions, we also seek to gain further perspective by constructing a bull – rising market – and bear – falling market – case scenario for each company.

‘Banks, for example, are currently not only trading at an attractive discount to our base case valuation, but are actually trading around our bear case scenario. Already, the shares are effectively pricing in a potential sovereign downgrade.

‘No individual can forecast the future accurately which is why we embrace a probability perspective, rather than believing there is just one view and that ours’ is the correct one,’ he says. ‘We want to understand the different outcomes that may play out over time and assign a probability to these.’

He explains there is a good behavioural reason for encouraging investment analysts to focus on three scenarios.

‘In a single focus investment process, human nature can sometimes result in an individual either falling “in” or “out” of love with a share, where personal bias can cloud the investment thesis. We gain more value and insight from analysts’ probability weighting in addition to the three scenarios.’

Understanding valuation is, however, a main focus – and for good reason.

‘Value as a style – looking for stocks that appear undervalued by the marketplace – outperforms over the long term, but it can go through lengthy periods of underperformance, as has been the case with value managers recently. Our research into the performance of other factors in the South African equity market over the last 26 years shows that value is not the only factor driving outperformance. Adding other long-term outperforming factors to our valuation ranking improves diversification and provides more holistic insight when picking stocks.’

Linley adds that it is also important to constantly analyse the failure and success of decisions.

‘It’s imperative to know if I was right for the right reasons or right for the wrong reasons and so just lucky. Investing is as much about psychology and human emotions as is it about science and math.’

Patience
When it comes to companies and their share prices, Linley believes that there needs to be a long-term perspective rather than concerns over returns in a month’s time.

‘Markets across the world are largely driven by short-term behaviour and emotionally-driven decisions destroy returns. To succeed, a successful investment management team needs a sensible investment philosophy and must operate within a disciplined and structured process.’

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Sound risk management
Throughout the investment process, prioritising risk management is essential. ‘A fund manager is paid to take on risk on behalf of the investor, so we need to continually guard against unintended risk. In our portfolios, outperformance is not only driven by the winners, but also by avoiding the losers.

‘For example, the risk of capital loss in African Bank was simply too big for us. The worst thing you can do as an investor is hang onto poor performing stocks that in reality have no ability to recover,’ says Linley.

Intelligent diversification
Intelligent diversification, Linley explains, is essential once all the research has been done. ‘It’s not how many shares you buy but the diversity of these stocks. Even 20 stocks may not be intelligent diversification if they are all in the same industry or style bucket.

Ensuring adequate diversification requires an analysis across shares, industry, style, macro drivers, regions, currencies and more.’ He adds that geographical diversification in SA portfolios is a lot easier than it was 50 years ago. ‘Companies listed on the JSE, including Naspers, British American Tobacco, Richemont, AB InBev, MediClinic, Steinhoff, Mondi and Aspen have a strong presence outside of South Africa.’

Patience pays off
Since taking over the management of the fund eight years ago, Linley and his team have ushered in a new generation when it comes to their investment approach, and this has clearly paid off.

The most consistent benchmark to compare the Old Mutual Investors’ Fund against, since its inception 50 years ago, is inflation. And while the SA Inflation Index returned 9%, the fund returned 17.4% to end August 2016. When comparing the fund’s performance to its peer group, it was top quartile over one, two, three, four, six, seven and 10 years over the same period – a feat only achieved by a handful of funds in its category.

Ultimately, there are no shortcuts to delivering competitive returns over the long term. ‘A sensible philosophy combined with a disciplined process is part of the fabric of Old Mutual Investors’ Fund,’ says Linley. ‘As information flows quicker than ever before, it is increasingly difficult to successfully manage an equity portfolio without this combination of attributes.’

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Mutual Park, Jan Smuts Drive,
Pinelands, 7405
Tel: +27 (0)21 509 5022
www.oldmutualinvest.com
Old Mutual Investment Group (Pty) Ltd is a Licensed Financial Services Provider.
Old Mutual Investment Group (Pty) Limited (Reg No 1993/003023/07) is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002.Source: Morningstar returns, net of fees, to 31 August 2016. Old Mutual Unit Trust Managers (RF)(Pty)Ltd (OMUT) is a registered manager in terms of the Collective Investment Schemes Control Act 45 of 2002. The fund fees and costs that we charge for managing your investment is accessible on the relevant fund’s Minimum Disclosure Document (MDD) or Table of fees and charges, both available on ourpublic website, or from our contact centre. The Net Asset Value (NAV) to Net Asset Value figures are used for the performance calculations. The performance quoted is for a lump sum investment and in respect of the Old Mutual Investors’ Fund. The performance includes income distributions prior to the deduction of taxes and distributions are reinvested on the ex-dividend date. Actual performance maydiffer as a result of actual initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. Past performance is not a guide to future performance. Annualised returns are the weighted average compound growth rate over the performance period measured. The actual highest, average and lowest 12-month return figures since inception to 31 August 2016 are 96.0% (highest),20.0% (average) and -45.7% (lowest). The fund was launched on 31 October 1966. Morningstar and Old Mutual Investment Group calculated the performance of the fund as at 31 August 2016. Old Mutual is a a member of the Association for Savings & Investment South Africa (ASISA).