*Brought to you by PSG Asset Management. #BiggerPictureThinkers
By Paul Bosman*
With Valentine’s Day behind us, many of us are turning our thoughts to the National Budget, the other significant event in February. Interestingly, our personal relationships and our relationship with money have more in common than we might think.
If a healthy relationship breaks up through a moment of emotional irrationality, the loss of decades of foregone happy cohabitation is an unnecessary travesty. Just as a great relationship can be brought to an end impulsively in a moment of trial, even the best unit trusts can generate poor returns for those clients who exit the fund at the wrong time. Such a tragic break up is to the detriment of both the client and the asset manager.
Often long-term relationships stand us in good stead. It is common knowledge that investing in a unit trust should be a long-term endeavour. In fact, very few unit trust investors would proclaim to follow a short-term approach. Why then do so many investors panic and sell at, or near the bottom of a fund’s performance?
It’s not easy making long-term investment decisions while preventing irrationality when the pressure is on. The heat was turned up in the beginning of 2016 and, tragically, a number of clients exited the PSG Stable Fund at a very unfortunate time.
Fund manager decision making
Fund managers are emotional beings and therefore we need to have measures in place to ensure that we remain rational when those dark clouds gather.
So how can fund managers remain rational when market sentiment strikes emotional cords? A strong decision making framework is the way to go.
One example of such a situation would be when a company, which is held in our funds falls out of favour in the market due to industry or company specific challenges. It is at this point that we run our checklist. These questions include:
- Is the management team’s integrity still intact?
- Is the management team still making sensible capital allocation decisions? Â
- Is the company’s competitive advantage intact, generating satisfactory returns on capital?
- Does management have balance sheet wiggle room?
- Is the share pricing in an extremely unlikely scenario?
The drastic sell off in resource companies and South African financial companies during 2015 are prime examples of when we had to rely on our checklist.
Investor decision making
When it comes to the decision to remain invested or exit a unit trust, and if the asset manager in question has a long-term track record of outperforming benchmarks, PSG recommends the use of the following checklist to ensure your own rational decision making:
- Is the asset manager remaining consistent to its investment philosophy?
- Is the manager clearly communicating the reason for poor short- and medium-term returns?
- If not, why not?
If there has been communication, some good reasons for sticking with your manager would include if they are acting in a contrarian manner, which is inflicting short-term pain for long-term gain, or if there is a prolonged dislocation between the price to buy shares in a company, versus what they are actually worth.
If either the portfolios were too highly correlated (i.e. concentrated bets), or if there has been a normalisation of multiples (i.e. your manager was invested in over-valued securities), be cautious of continuing your support.
A recent example of when the above checklist would have been helpful was during the short-term underperformance of the PSG Stable Fund at the end of 2015 and beginning of 2016.
According to Israeli-American psychologist, Daniel Kahneman our decisions should be grounded in the logic of probability. This is possible if we follow a decision-making framework rather than act on emotion.
We will do our outmost to continuously adhere to this wisdom. We strongly encourage you to do the same.
- Paul Bosman, Fund Manager, PSG Asset Management
