This is an interactive narrative map. Expand, drag and select.
This is an interactive narrative map. Expand, drag and select.
This Thought Leadership Narrative was designed to be provocative. Its express purpose is to provoke investors and trustees into thinking more for themselves: about the funds they oversee and the responsibilities they have to ensuring that those funds address the specific goals that they need to achieve. Some people will see this narrative as reflecting ideas that are “not within the grasp of the average Trustee or investor”. We, however, are believers. We believe that when properly informed and assisted, members with little financial background are quite capable of arriving at a far clearer understanding of what is “right” for their goals than many might anticipate. We believe that the real dilemma that investors face relates not to a capacity for understanding but to a paucity of informed advice.
In SA the asset consulting industry is fighting for its survival as trustees become increasingly reluctant to pay anything but bargain basement fees and competitors from a broad array of sources – administrators, custodians, multimanagers and even asset managers, encroach upon their turf with the promise to provide the same resource as a no-cost add on.
Understanding how financial decisions are made by both individuals and groups sits at the heart of effective investing and investment decision-making. For the most part, these decisions are filtered by how our brain makes fast and slow judgements, the social context we live in, the mental models our environment creates, our psychological pre-disposition to money and the power of group dynamics.
WELCOME to the third issue of Collective Insight. The first two elicited favourable responses beyond our optimistic hopes, and we continue to receive requests for extra copies of both. We chose the topic for this issue – “Use and abuse of numbers” – because each of us has encountered many striking examples of both in the South African investment arena.
“The wealth which enslaves the owner isn’t wealth,” according to a Yoruba saying. This principle extends to the investment world – much like wealth, returns are only a means to an end. Some investors mistakenly focus only on their returns, completely ignoring why they invest money in the first place.
Our next section covers a broad range of investment philosophies and strategies. If we want to make a distinction between Investment Philosophies (investment styles) and Investment strategies, think of it this way: Investment philosophies address where an asset manager feels they can find outperformance in the market.
Understanding the characteristic of asset classes becomes useful when we want to consider why we would want to hold them in our portfolio – for example, if we know what kind of economic environment the asset performs well in (or poorly), we can consider what blend of assets we need in our investment portfolios to meet the funding requirements we are targeting.
While there has been a lot of "talk" about ESG and Sustainable investing, just how well is the South African asset management industry doing in terms of living up to the hype? Nicole Martins, head of the PRI in South Africa, provides a comprehensive update on the real state of ESG and Sustainable Investment strategies in South Africa.
We believe that the articles in this edition provide an excellent overview of the distinctive elements of the asset allocation decision – both the type of strategic, long-term asset allocation decisions that trustees, financial planners and investors have to make to achieve their long-term funding objectives and, the shorter term, tactical asset allocation decisions that are the hallmark of active balanced asset managers seeking outperformance over the immediate future.
This issue is dedicated to the complex task of understanding just what risk really means in the investment context. We’ve decided to tackle the problem on multiple levels. This edition spans the topic by providing articles that range from being highly accessible to the noninvestment layman, to highly informative for those readers trying to get a more comprehensive insight into the issues.
BENCHMARKS: shun them, hug them or race against them, they’re an indelible element of modern professional investment management. In this issue we’ve collected insights from throughout the industry to inform and challenge our views on benchmarking investment performance and its effect on manager selection and the investment process.
SAVING AND INVESTING are critical components of everybody’s longterm retirement planning and general wealth creation. As with any product we need to start with a clear understanding of whether the value of the strategy is compensated for by the cost.
Our natural impulse is to assume that past performance indicates manager skill. We are told this is wrong. In fact - it often provides very different, but still important insights. This article highlights how big the disconnect can be between performance and an assessment of manager skill.
While this edition of Collective Insights was our very first, it still contains some nuggets of wisdom about the dynamics between investing and the actual economy. The connection between economics and investing seems obvious, at least at one level.
Stock markets were traditionally a venue for companies to raise money to finance growth. But the number of listed companies has collapsed in many parts of the western world, suggesting that markets perform this function less and less. Easier access to alternative sources of financing alongside the increased cost and hassle of a public listing are all partly to blame.
There’s a story that warrants telling to the millions of South Africans who are exposed directly or indirectly (through their retirement funds) to the asset management industry. Today we take for granted the quality of asset management that guides the over two to three trillion in assets under professional investment management in our country.
A good compromise, a good piece of legislation, is like a good sentence; or a good piece of music. Everybody can recognise it. They say: “Huh, it works. It makes sense.” Barack Obama. Will the spate of new regulation really make the world a safer place for investors in the aftermath of the global financial meltdown? This is the dilemma facing financial markets and players worldwide.
The future of financial advice will be less about introducing individuals to different financial solutions or products and more about having clients manage the trade-offs over the course of their lives around different financial solutions. This edition of Collective Insights helps both planners and investors understand how to change their perspective to be more effective in managing these trade-offs.
Most investor education programs do little to take investors beyond a textbook understanding of investments and the associated jargon. This leaves investor – both the lay investor and the professional, particularly vulnerable to either the marketing prowess of the asset management companies, or the seemingly definitive rankings reflected in the performance surveys. Neither serves the fund’s best interests. What this narrative attempts to introduce are some reality-based insights into what really counts in terms of their effective stewardship. It aims to shed light on what their expectations should be of their advisers and their asset managers. And it hopes, above all, to provide investors with the conviction and the confidence that they need to assume control of the process that determines what is best for meeting their goals.
Learning how to be an effective investment decision-maker is a dynamic process. It demands that the participant stay in touch with the latest insights. Typically, these insights have more to do with understanding what really is driving performance outcomes (most often, very little that the asset manager can control) than it has to do about having insights into economic conditions in the world or the proper valuation of markets. Ironically, when asset managers do get it right, it may have less to do with getting the “numbers” right and more to do with understand what the market participants think are the right numbers. That’s why understanding human behaviour may be one of your best skill sets. Think of your world class poker players – it’s as much about intuiting how the other players will respond as it is about it is about knowing the odds of your hand winning.
But if that makes investing sound like a total crapshoot, then what we want this narrative to achieve is to show you how strategies can be structured that have a high probability of meeting the outcomes you require. You just need pay less attention to the hype around investing and more attention to what realistically can be achieved. The answer to that is “quite a lot” – but perhaps not by doing what you thought you should be doing.
The pages that follow are hardly an exhaustive study of the subject. Don’t get put off by the dates when specific articles have been written. Some articles reflect insights that will withstand the test of time. Where we need to keep you up-to-date with the research, will make sure we include those articles.
We have only just begun the analysis. But we are indebted to our clients, our colleagues and our competitors for stimulating the discussion and providing us plenty of ammunition for an on-going debate on a thoroughly dynamic subject. We welcome inputs from one and all.
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