By Leigh Köhler, 16 February 2018
In fact it is such a difficult task that the entire multi-management and fund manager research industry has been created - based on the premise that there are in fact skilled individuals out there, with access to more information than the average investor, and therefore able to better identity superior performing unit trust funds. But even these experts find it difficult to identify funds that consistently outperform investor’s expectations on an on-going basis.
Fund managers who manage these unit trust funds perform differently given similar economic and market environments, similar investment opportunity sets, and even similar investment mandates. Therefore, given the same opportunities, obstacles and rules, fund managers perform differently. So why does fund performance differ?
Fund manager research teams, such as Glacier Research, spend countless hours trying to answer this question by understanding the differences between fund managers through focussing on qualitative factors such as the investment philosophy, process, people, organisational structure, and costs of funds – with the aim of identifying funds that are superior to peers.
Glacier Research spends a lot of time gathering and analysing data, which does not only include quantitative information such as performance, but also fund manager characteristics such as manager age, tenure, undergraduate university attended, whether the manager holds a CA, CFA or MBA qualification, investment team size, investment team diversity focussing on female and employment equity representation, co-investment, share ownership, investment style, decision-making (intuition vs. model and individual vs. team) and company affiliation.
So we are getting better and better at understanding fund managers at an individual level. But what does the South African fund management industry look like collectively - from an aggregate level?
Glacier Research recently conducted a study with SA fund managers that provides a unique aggregate view of the industry. The results can be used to benchmark and compare fund managers using specific fund manager characteristics, rather than conventional performance and risk.
The data set was collected over the course of 2017 and comprised of 146 funds across the ASISA Multi Asset Low Equity (LE), Medium (ME) Equity, High Equity (HE), Flexible Equity (FE), and General Equity (GE) categories. We selected these categories because they have attracted the most assets over the last few years. The sample excluded all multi-managed funds and fund of funds. LE represented 21%, ME 10%, HE 28%, FE 21%, and GE 63% of the funds. The HE category is the largest by AUM, attracting 47% of AUM, while the ME category is the lowest attracting 4% of AUM. The study used five-year performance (measured by cumulative net returns) and risk (measured by standard deviation) figures for the period 1 January 2012 – 31 December 2016. It is important to note that for the purposes of the exercise, overall performance and risk was averaged across fund categories depending on the fund manager characteristic in question.
We will now look at some of the more interesting results on the study, focussing on manager age, tenure, undergraduate university attended, whether the manager holds a CA, CFA or MBA qualification, investment style and company affiliation.
87 different fund managers representing 54 asset management companies were responsible for the management of the 146 funds in the sample. The average age of the fund managers in the data-set is 47 years, while the oldest fund manager was 64 years old, and the youngest, 30.
The average tenure (number of years managing the fund) is 7.7 years, with the shortest tenure at 0.5 years and the longest at 17.6 years. Only 4% of the sample are female fund managers, while a staggering 96% of lead fund managers are male. This shows us that the South African fund management industry is still dominated by male fund managers.
Fund managers between the ages of 45-49 produced the best five-year returns (11.96%) at relatively moderate levels of volatility, while managers between the ages of 35 – 39 produced the lowest levels of returns (9.39%) over the period. Managers between the ages of 50-54 took on the highest levels of risk, 9.11% (measured by standard deviation), while the youngest age group of mangers took the least risk (6.42%) over this period. The performance of managers above 60 is worth noting as well – relatively high performance (11.68%) at lower levels of risk.
When analysing the funds according to fund categories, we see that managers above the age of 60 performed best in the GE and LE categories. Fund managers above 45 years old perform better than managers younger than 45 in FE, HE and ME categories.
Managers of funds with a tenure between 16-21 years produced the best five-year returns (14.05%). It is interesting to note that managers with a tenure greater than 21 years returned the least (7.12%), but at far higher levels of risk (18.20%).
When analysing the data according to fund categories, it is interesting to note that managers with 16-21 years’ tenure dominate performance in the GE funds, however managers with 11-16 years have outperformed in the FE and HE categories.
The most striking observation from the data is that almost half of the sampled fund managers obtained their undergraduate university degree from University of Cape Town (UCT). All the fund managers in the data set obtained an undergraduate degree - 46% from UCT, 10% from the University of Stellenbosch (US) and 8% from the University of Witwatersrand (Wits). Therefore 64% of the sample completed their undergraduate degree at Tier 1 (UCT, US and WITS) universities, 30% at Tier 2 (rest of SA universities) and 6% at Tier 3 (international universities). Interestingly, only 1% completed their undergraduate degree at a technical university (Cape Peninsula University of Technology - CPUT).
The highest average performance over five years was generated by fund managers who attended the University of the Free State (UFS) – 13.25%, while the lowest returns were generated by managers from UKZN – 8.69%. There is no significant difference in returns between Tier 1 – 3 universities.
It is interesting to note that when analysed according to fund category, managers who attended Tier 2 universities produced the highest performance across all categories, expect LE, where managers who attended Tier 3 (international) universities fared the best over five years.
49% of fund managers are CFA charter holders, indicating the growing relevance and importance of this international qualification within the fund management industry. 27% of the sample are chartered accountants (CA) while only 18% hold an MBA qualification. 5% of the fund sample is managed by fund managers with a MBA/CFA combination, 1% with an MBA/CA combination, 17% with a CA/CFA combination, and 0% with an MBA/CFA/CA combination. The rest of the sample is managed by fund managers with at least one of these qualifications.
Fund managers with an MBA produced better returns (11.58%) and at lower levels of risk (7.77%), than fund managers without an MBA (performance = 10.77%). The observation that MBA graduates produced better five-year returns held across all fund categories except FE. The evidence also suggested that managers with an MBA degree took on less risk across all fund categories in order to generate returns.
Very interestingly, the results above indicate that fund managers with a CFA qualification underperformed (10.24%) managers without (11.59%) a CFA qualification – and they did so at higher levels of risk. The observation that non-CFA managers outperformed CFA managers over the five-year period held across all fund categories.
Fund managers with a CA qualification outperformed (11.68%) non-CA managers (10.65%). However, it seemed that fund managers with a CA qualification were willing to take on more risk to generate greater returns. The general observation that the CA qualification outperforms the non-CA qualification held for all categories expect HE and LE.
51% of the fund managers reported to employing a value style to investments, 17% quality, 7% growth and 0% momentum. 25% of the fund managers claim to be agnostic to any one particular style – and may employ different investment styles, depending on opportunities and environment.
Fund managers purporting to have a quality style dominated returns over five years, while value managers performed the worst over the period.
Fund managers who make use of a quality investment style have dominated performance across all fund categories, while value managers have performed the poorest across all categories, except ME.
There are two very important aspects to consider when interpreting these investment style results. Firstly, the dominant market cycle during the time of the analysis should be taken into account and therefore future studies should conduct testing over various market cycles. Secondly, in practice, fund managers in South Africa are often wary of constraining their investment philosophy to one style, hence a relatively large (25%) proportion of the sample claiming to be style agnostic. It is also not uncommon to find managers who claim one style but employ another.
Asset management companies are usually aligned to banks, insurance companies or are independent. 59% of the funds are affiliated to an independent asset management firm, 27% to insurance, 12% to banks and 2% to wealth management. Independent firms include large fund managers such as Coronation, Allan Gray and Foord.
The results revealed that companies associated with wealth management produced the best returns (15.41%) over the five-year period. However, it is important to note that wealth management is only represented by one company. The returns of both bank associated asset management companies and independents are comparable (11.19% and 11.25% respectively).
Excluding the one wealth management company, companies linked to banks have produced the best five-year returns for the GE and HE funds, while independent asset managers have produced the best returns for the FE, LE and ME funds.
There are many ways to compare one fund manager with another. Traditionally, quantitative factors such as performance and risk are used to create comparison benchmarks. However, this study suggests that one could use characteristics such as age, tenure, undergraduate university attended, CFA, CA, MBA qualifications, investment style or company association, to benchmark fund managers.
Our next paper will look at investment team size, investment team diversity focussing on female and employment equity representation, co-investment, share ownership, and decision-making (intuition vs. model and individual vs. team).