Andrew Summers is the Head of Fund Research for Investec Wealth Management, and has had a lot of time to think recently about what fund selectors have been up to. It's a complex investment environment at the moment, so how have those working in funds been coping with it?
There is a good reason why we take our time to find managers to give our clients’ money to. It is so at times like this we are confident that we have selected the individuals and teams with the right skillset, temperament, approach and discipline to be doing the right thing. It is also important that they sit in organisations providing the right immediate and long term support to ensure investment excellence in whatever market conditions we find ourselves.
It also means we have a good idea of how funds were positioned going into the crisis, what sort of decision making will be undertaken during the crisis and how the portfolio might look as we consider a recovery.
As the immediate crisis passes or it becomes clearer which companies will survive 2020 and which won’t, their focus seems rightly to us to look to which companies will emerge stronger from this crisis and where true value lies.
This means we can leave our managers to ‘get on with the job’ without bombarding them with questions every day about what they are or are not doing or how they might react to various scenarios or hypothetical situations.
This doesn’t meant that we aren’t in touch. In fact, our ‘normal’ timetable of manager meetings and research output has been up-ended as we have held in depth conversations with nearly all of our fund managers since the end of February.
Finding the right moment
But this outreach is tempered by the rationale for it: we see times like these as exceptional opportunities to understand even more about how our fund managers think and operate; what their strengths and weaknesses are; how substantive or malleable their approaches are; how dogged or flexible they are. These are not necessarily pejorative terms; any could be fine in the right circumstances.
But at times of stress even element of an investment offering – the people, the philosophy and the process – are all tested. This is an excellent opportunity to further our knowledge and to extent our competitive advantage, which is information and knowledge afforded to us by virtue of our experience, resources and access. We believe this is the best way we have to pick future outperforming active managers.
Benchmarking in times of crisis
Relative performance was, is and always will be key in this endeavour. It is obviously the clearest and most relevant (if not the ONLY) benchmark by which to measure active management. However, as we saw in the aftermath of the EU referendum in June 2016, immediate relative performance during the early weeks of Covid-19 will be largely down to luck. How funds were positioned going into the downturn that very, very few people could have anticipated.
Once the crisis was upon us, however, there are no excuses – all managers have the same chance to demonstrate their flair in such circumstances. How fund selectors and investors react to funds that chalked up either relative outperformance or underperformance in the immediacy of the market fall will be interesting. We would argue that insofar as past performance rarely is predictive of the future, it will be certainly the case in those first few days which could nevertheless move funds around by more than a quartile or two on one or three or possible five year numbers.
We have been surprised by the limited activity of our fund managers during this period. Perhaps we should not have been. There has been a remarkable consistency of approach regardless of style or market segment. Fund managers have moved quickly to identify areas of immediate weakness and have looked to reduce this risk, although in many instances markets have moved ahead of them to more than factor in this risk.
As the immediate crisis passes or it becomes clearer which companies will survive 2020 and which won’t, their focus seems rightly to us to look to which companies will emerge stronger from this crisis and where true value lies. The world has changed, but we probably don’t know yet where, how or by how much. Acting too fast runs the risk of injudicious actions. In nearly all instances we acknowledge that fund managers will have time to get these decisions right, which might after all be multi, multi year outperforming trades.
Embrace the new normal
What I am describing might sound like a cacophony of competing considerations: don’t rush, but be alert to opportunities; look for long term winners but don’t be anchored by the past; look for true value but beware of a world that has changed in ways we might not yet know.
If it does, it truly reflects the complex world of investment management and the need for careful judgements by investors. It also demonstrates why active fund management selection isn’t easy. Understanding, interpreting and assessing many, many different active management styles and approaches and personalities that go with them is challenging. However, we have never had a greater chance to truly get under the bonnet and see what these potential ‘alpha engines’ are truly made of. We must grasp it.