SA’s top performing unit trusts: grey-haired investment managers are winning the race

Fund managers with many years of experience under their belts are producing superior returns. Names like Piet Viljoen, Anthony Sedgwick and Dave Wood dominate the top rungs of the latest unit trust performance charts.

Is it a case of being more cautious with age and this risk aversion paying off? Not according to Wilhelm Hertzog of RECM, who tells Alec Hogg and Gugulethu Mfuphi on the CNBC Power Lunch show that 'experience gives asset managers like these the ability and the awareness of risk, maybe more so than what you see amongst inexperienced people in the market'.

David O' Leary, South African fund research fundi at Morningstar, agrees that it's hard to beat experience. Although investment styles and philosophies are generally suited to different market conditions, 'experience pays off in all environments', he says.

With the big percentage differences in performance between unit trusts, it seems like a good idea to pay close attention to the age of the person who is managing your investment. Even the small percentages can have a significant impact on your long-term investment returns, is the reminder in these interviews. – JC

To watch the interview on CNBC's Power Lunch, click here.
[table id=7 /]

ALEC HOGG: With hundreds of unit trust funds to choose from, you may be at a loss as to how to decide which fund to invest in.  David O'Leary is the Director of Fund Research of South Africa at Morningstar.  He joins us now to have a look at top-performing unit trust funds over the last three years.  Before we bring David in though, Gugu, did you know there are many more unit trusts than there are share listed on the JSE?  I kind of scratched my head at that the other day.  It's almost counter-intuitive.

GUGULETHU MFUPHI: Very true,  but I think what was interesting was what you mentioned to me off-air, that the investment period that one holds their unit trust for, should be a minimum of three years and that's so odd.  I think there's a lack of investor knowledge in the South African community.

ALEC HOGG: Definitely. Well David, can you give us your thoughts on this?  We've always felt that three years is the minimum period because at least that will smooth out the ups and downs.  What's your thought on that?

DAVID O'LEARY: Yeah, it's hard to pinpoint an exact minimum.  I think three years is not a bad place to start.  I prefer, generally speaking, the longer the better.  You can get a period of three, four, even five years where a manager, or a fund under-performs simply because it's the wrong place at the wrong time for that investment style.  So there is no magic period at which it's a long-enough period of time, but generally speaking three years would be on the short end of a minimum amount of time you'd want to evaluate a fund.  And then of course, that's also relative to the types of investments being made.  So the more volatile those investments are, like equities versus bonds, or short-term cash instruments, the longer the period of time you'd want to invest.

ALEC HOGG: Thanks for pulling out the numbers for us David, – for the three years to the end of September.  Of course, being at quarter end it's always nice to tot up who is winning and who's not doing so well.  It is interesting to me to see that the top performer – and we've taken the three major categories: domestic equity/domestic multi-asset, which I guess is flexible funds and then offshore equity.  And in all three of those the guys have scored in the 20's – in this high 20's, but there's a clear winner ahead of the second player. There's a clear winner.  So, for instance in offshore you've got Regarding Capital Management – 27.5 percent return as against Coronation at 24.5 percent.  So there's a three percentage point gap, which is substantial.  Similarly, in the domestic multi-asset, Forward Absolute Return Fund – 29.5 percent; number two is 24.5 percent and so on.

DAVID O'LEARY: Yeah.  I'd say three percent is certainly meaningful.  It's nothing to turn your nose up at – and that's also annualised over that three-year period – so it certainly is meaningful. It's an amount that can change rapidly in a short period of time.  So if a manager gets a few calls wrong or if the market turns out of their favour for that particular investment style, that lead could grow significantly or dissipate dramatically as well in a short amount of time.

GUGULETHU MFUPHI: Well, let's bring in our Global Feeder Fund winner; and that's Wilhelm Hertzog.  Wilhelm, you're an Investment Analyst at RECM.  You join us now on the line.  Taking a look at your offshore performance; very strong – 27.5 percent there, well ahead of number four which is at 22 percent.  What did you guys do right in order to see such strong returns from your offshore investments?

WILHELM HERTZOG: Hi, Gugu.  What we've done right over time, is to stick to our investment philosophy and to follow a disciplined process to implement that philosophy into portfolios.  So we follow a very strong value philosophy and we have advised towards high-quality businesses.  Sticking to that philosophy has worked well over the last three years, but as David mentioned earlier, three years is probably the bare minimum time period that one wants to look at.  In our experience and in our view, one typically wants to look at full market cycles; so peak-to-peak or trough-to-trough.  Having said that, through full cycles our Global Fund and our Global Feeder Fund have delivered very good returns and it is really due to buying assets that are priced cheaply in the market and favouring that.

GUGULETHU MFUPHI: Wilhelm, just on that; economic times differ and there's change and peaks and troughs.  How do you construct a solid portfolio in tough economic times?

WILHELM HERTZOG: Well, we follow a bottom-up process, so we look at the economics and the characteristics of individual businesses, try to assess what the share value is of that business and the shares of that business and then try to buy them at a deep discount to the share value.  It's as simple as that.  There are obviously factors you have to take into account and it's simple.  It's not easy.  But that's what we do.  We try to assess the economics of businesses and try to decide 'what's a good price to pay for them?'

ALEC HOGG: Wilhelm, I'd like to get your view on this.  And David if we could hear from your perspective too: It's a difficult investment climate at the moment and it appears as though the cream is rising to the top.  You've got Piet Viljoen and Wilhelm and the team at Regarding Capital Management.  They've been around for a long time.  In the domestic equity – Antony Sedgwick and Tim Allsop – very well-known names that have been there for ages. They did by far the best there.  And then of course, Dave Wood, a real veteran – taking on those in the other category.  Is it 'in difficult times we experience benefits?'  Wilhelm – you first.

WILHELM HERTZOG: I think 'experience benefits throughout'.  I wouldn't say it's only in difficult times.  I think what experience gives you is the ability and the awareness of risk, maybe more so than what you see amongst inexperienced people in the market.  And I think that's where RECM has stood out in terms of our historical returns and our track record.  We've protected capital very well in down-cycles.  So for the past three years you haven't had a major down-cycle in the market like you had in late 2008/early 2009.  But even in mid-2011/mid-2012 you had some sharp draw-downs in markets globally and in that type of environment our investment returns have generally been much better than that of the market which is also characteristic of value-investing generally.

GUGULETHU MFUPHI: David – your thoughts?

DAVID O'LEARY: Yeah, I'd agree with that.  I think experience pays off in all environments.  There are certain investment styles and philosophies that typically do well when markets are falling.  So, as I mentioned, your value investor would typically expect to do well in a poor market.  That said, you know we saw a lot of value investors get hammered in the 2007/2008 financial collapse because that was really driven by a lack of liquidity.  And any firms that had balance sheet issues – which it wouldn't be uncommon for a value investor to load up heavily on names that are out of favour or that might have a little more risk on their balance sheet – got hurt.  And so you saw a lot of value investors and even very experienced value investors who, like at Morningstar, got hurt considerably during that period of time and it didn't have anything to do with whether or not they were experienced enough.  It was an abnormal period of time that just isn't working well for a value investor. Those managers who stuck with it, rebounded nicely when the markets rebounded.

GUGULETHU MFUPHI: Just to close off, this question goes to both of you.  I understand that there was a recent Responsible Investing Summit that took place in Cape Town just, I think, a week or two ago:  Any takeaway points that you got from there?

DAVID O'LEARY: I'm not familiar with the conference.  I didn't attend.

WILHELM HERTZOG: To us, responsible investing is not a box-ticking exercise.  It's something which we look at consistently throughout our investment universe.  It's to do with applying your mind to corporate governance, making sure that you're electing the right Directors onto the Board, looking at the long-term sustainability of the firm and that's really the mindset we bring to it.  So we think it's important to factor those things into one's assessment of the overall value of the economics of a business as opposed to just going through the motions and ticking the boxes and signing some agreement and saying 'we're now a socially responsible investor'.