Perception is greater than reality…
There has been a plethora of information circulating about the coronavirus; some fake, some accurate and some in-between. In this social media age, shocking and panic inducing news tends to get the most likes and retweets. Health care specialists and governments have their hands full trying to quash untruths. A good fund manager, on the other hand, is particularly interested in what most people believe to be true. Why? Because people act based on what they believe, more than what is actually true – perception is greater than reality. The fund manager then assesses the potential impact of these actions on stocks in order to identify a buying or selling opportunity. For example, some contagious disease experts warn that face masks are actually not particularly useful in preventing transmission of the virus. Whether this is true or not is beside the point of this article. The fact that face masks are very hard to find tells us that there is very much a belief that it is effective, at least to an extent where it is worth buying. This belief is good for businesses that manufacture and/or sell face masks. The fund manager will then be more inclined to buy listed companies that have exposure to face mask businesses, particularly when purchases are being fuelled by panic. Similarly, fund managers will be more inclined to sell listed companies with large exposure to the travel and tourism sector as cities and entire countries make efforts to curb non-essential travel 1. When it comes to investing in stocks, timing is important. Several high-profile cases over the last decade have illustrated the impact of not selling timeously.
Sasol share price decimated
Very topical at the moment is the crashing of Sasol’s share price. The company lost 95% of its value since last year, trading at about R30 at the time of writing. This is a well-established company; for a long time one of the largest companies on of the JSE, that peaked at just over R640 per share in June 2014. The current crash is not coronavirus related, but largely due to the oil price drop resulting from the oil price war between Saudi Arabia and Russia. The general drop in Sasol’s price over the last few years, however, has been due to a severe underestimation of the cost of one of its projects in Louisiana (Lake Charles). If you currently hold Sasol shares, you would understandably be very close to panic state – if you haven’t reached there already. You may be closely following your investment/retirement portfolio and be aware that your fund managers have invested in Sasol on your behalf. In fact, your portfolio may be in such a bad state that you are seriously considering withdrawing your funds, if possible, (some restrictions exist on pension funds investments) or changing fund managers. If the former, whilst not necessarily a bad decision, remember that you only actually incur the loss once you sell out – you may be better off doing nothing and waiting for the shares to recover over time. If the latter, you should consider whether you need to change the manager or the actual fund itself. Most asset management houses will offer a variety of funds, designed to cater for various investor risk profiles and needs. There may also be costs to switching funds. I would recommend talking to a professional financial advisor to re-evaluate your personal portfolio.
Before you withdraw all your money and put it under your mattress, remember that context is important – for every African Bank, Steinhoff or Sasol that makes headline news for dramatic share price collapses, there are many more listed companies that are in good shape. However, this does not mean that your fund/portfolio management company should not be held accountable for poor investment decisions.
Some things to keep in mind when evaluating the performance of your fund manager
- Your agreed investment objectives and strategy – did your fund manager stick to the overall strategy discussed (likely with a financial advisor) before you made the initial investment? The risks pertaining to the strategy would also have been brought to your attention, particularly the relationship between risk and potential reward, the importance of diversification and the recommended minimum time period for investment in order to reach the objectives.
- Compare apples with apples – during times of financial market weakness, one would expect low equity portfolios to perform better than full equity portfolios. But during boom, the low equity portfolio would not make as much gains due to its limited exposure. Before you compare the performance of your portfolio with a friend’s, make sure that the risk profiles are the same. This way you will be able to fairly tell whether your portfolio has been an underperformer, average or over performer.
- Compensation structure – Ask how your fund managers get paid. Do they get paid a flat salary irrespective of fund performance? Or is there a bonus element linked to the performance of your portfolio? They’ll have more incentive to get you the best return if it directly impacts on their pockets. Also note the company’s sales strategy to get assets under management and, specifically, the fund managers role in it. Any time fund managers spend chasing sales is time spent away from focusing on actual stock picking. I’d say a healthy split is approximately 80/20. If your fund managers are spending less than 80 percent of their time on activities dedicated to stock picking then I’d be concerned that they are being distracted from the most important task to you – getting the best return on your investment. Ask if your fund managers have specified sales targets linked to their potential performance bonus. Ideally your want the company to have a sales force handle the recruitment of clients with the fund managers only offering support through professional presentations and subject matter expertise.
- No human being can see the future – Whilst many steps would have been taken to manage the risk on your portfolio, unexpected events like the coronavirus can occur. In terms of non ‘acts of god’, fund managers can only work with information in the public domain. Listed companies are required to share information equally with all investors and to the best of their knowledge. The common link between high profile share crashes is that material information was, at best, withheld from the public or, at worse, deliberately manipulated. Steinhoff being a clear example. Historically reputable auditing companies are increasing coming under the spotlight for dubious practices that supported misinformation to investors. Should fund managers also re-audit financial statements? Judge them based on what is realistically in their control.
Fund managers will get some decisions wrong; this is normal. What is important is that on the balance – over the agreed investment period – they get more decisions right so that your investment objectives are met. This is what they are trained to do and how they will ultimately add value to you.