Using surveys to understand investment performance outcomes
Tracking and reading market dynamics correctly helps trustees and investment consultants understand performance outcomes. Getting a view of market dynamics, however, means consistent tracking over time. For many years Alexander Forbes has produced surveys to help its managers and advisors accurately track trends and produce winning results.
To make the interpretation of its surveys easier and avoid misinterpretation of these results Alexander Forbes has added a quarterly commentary to its key surveys. “The aim is to empower the users of our surveys with the basic knowledge they require to understand performance over specific periods” says Kim Strydom, Head: Performance Surveys, Asset Consultants, Alexander Forbes Financial Services (Pty) Ltd.
Performance rankings don’t really address the kinds of critical questions that keep trustees and investment consultants up at night, like “how much of the performance that we are seeing is a function of manager skill (or lack thereof) and how much is market dynamics?” For example, the whole issue of whether active managers will outperform passive solutions is typically more a function of market dynamics at that particular point in time than it is manager skill. When the market becomes highly concentrated with just a few shares driving the performance, a portfolio that is regulated by Regulation 28 to maintain a diversified strategy with limits on its exposures to individual shares will simply not be able to outperform. Providing commentary with the survey data that will help users answer these and other critical questions “we believe brings a much needed interpretive dimension to the data” says Strydom.
April 2012 saw the issue of Alexander Forbes’ first quarterly commentaries for 2012. In addition to the standard survey data, these March 2012 surveys provide a summary of the main themes emerging over the first quarter to March 2012 - over the following four investment strategies:
Balanced Strategies / Portfolios
The past year has seen the Global Large Manager Watch balanced managers moving their assets to the full 25% allowed offshore, in terms of the amended Regulation 28 of The Pension Funds Act.
Locally over the last year, while the maintenance of high equity allocations accounted for some performance differentials between managers “by far and away the greater factor in creating differentiated performance was the managers' timing on their sector allocations” says Strydom.
Currently, the equity markets are posing one of the most extreme valuation challenges that active managers have seen in nearly 10 years. At the moment “the contrast is between the extremely high valuations on industrial shares – specifically the retail sector – and resources shares, whose valuations are at 10 year lows” explains Strydom. This means that “we are seeing as much as 20% performance differentials between managers this quarter which simply reflects the differential results that are forming between managers who elected to switch into the undervalued resources sector early and managers who have continued to ride the momentum in the industrials sector” adds Strydom. As foreign buying has been a big contributor to this momentum, a reversal in this outcome could be dramatic if this anomaly reverts.
During the first quarter of 2012, foreign investors in search of decent yields continued to be strong buyers of South African bonds. Events impacting on the bond market during this quarter included an unchanged repo rate after the March Monetary Policy Committee meeting and ratings agency Standard & Poor’s following the lead of its counterparts to downgrade South Africa’s rating outlook from stable to negative, citing political risk.
As such, “local investors continued to prefer inflation-linked bonds to nominal bonds and corporate and state owned enterprise bonds to those issued by the government” observed Strydom.
The best performing bond funds over the year to 31 March generated outperformance to the All Bond Index from exposures to both listed and unlisted credit. Corporate bonds provided the key. Both of these asset classes are ‘off-benchmark’ meaning that the manager outperformance comes from assets not included in the benchmark.
Money Market Portfolios
Cash has certainly not been the most exciting asset class over the past 12 months, struggling to deliver positive real returns. Despite the fact that the Monetary Policy Committee did not take any action during their March meeting, most analysts are expecting rates to “start ticking up either late this year or during the first half of 2013” predicts Strydom. As a result, some money market managers have started switching their portfolio holdings from fixed to floating rate instruments. This strategy appears to have been what accounted for the performance of the top funds in the survey.
While this very superficial analysis provides a general view of the main themes driving investment performance, more detail can be found in the March 2012 surveys and their associated commentary available at:
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