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By David Bacher*
It’s too common for investors to feel that their investment solution is rather “vanilla”. The products and funds they are recommended, and in which they are invested, can all feel the same.
To some extent their unease is justified. Actively managed funds in South Africa often seem to have holdings that include excessive overlaps with one another. Take this analysis a small step further, by comparing their main holdings to the equity indices, and you’ll find that many actively managed funds also hold very similar shares to the benchmarks to which they are compared. It seems that there may be reduced appetite for distinction in the South African active management industry.
Now there are rigorous, experienced, clever, and bold people in the South African investment landscape, which begs the question, why are we seeing this aggregation – or flocking – around certain stocks, particularly those that are keystones to indices? Some theories would include words like ‘complacency’. Big funds have had great success as businesses attracting huge inflows. There may be an impulse to protect not just the business but the investment model that underpins it.
Other theories might include the word ‘timidity’. Perhaps fund managers have become timid, unwilling to voice their ideas of greatest conviction because of peer group anxiety. For all their faults, sheep know that there is always comfort and warmth in the flock or, in this case, the flock stock.
A third theory might include the word ‘dilution’. Where good ideas – great ideas – are being voiced, it is quite possible that they are ‘diluted’ by the requirements of managing large scale assets. Some really forward-thinking stock picks might just be unavailable to large funds because the market capitalisation of the stock in question is simply too small to move the needle as a percentage of a large fund. In such cases even a thirty percent appreciation in the stock does not warrant the time, effort, and expense of including it. Other stocks are traded in such small quantities that it would take months to achieve a meaningful stake.
The dominance of flock stocks in funds should not be taken as confirmation that this convention is necessarily ‘wise’, or indeed anything more than received wisdom and in some cases a symptom of systemic or product limitations. Nor should the ubiquity of flock stocks inspire us to give in the ghost and defer exclusively to passive, index-tracking funds as the go-to solution. It should, instead, inspire us to distinguish ourselves.
And those funds of distinction exist. Corion’s Prime Concentrated Equity Fund, for example, has created a space in which the tethers of system or product limitations have been lifted, and investment thinkers are asked to contribute their “ideas of greatest conviction.” Corion has then curated these picks into a fund with a limited number of stocks, backed by sincere, unfettered conviction. The diversification in this fund happens by way of asking several thinkers for their unfettered picks, which means harnessing the focus of more than one mind without diluting the spirit of the fund. The intent of the fund is clear.
It’s an example of the sort of thinking that can unlock real potential in parts of the JSE that often seem sidelined, unlock the thinking of investment experts that often appear muted, and creates a fund that brings the “x-factor animal” to a portfolio’s stable, harnessing the power of a truly active investment experience.
There is a place for the flock in investing. It’s warm. It’s safe. It’s often fit-for-purpose. But when the flock rules the jungle, well, then superior performance is muted whilst incurring higher fees.
- David Bacher is the Chief Investment Officer of Corion Capital (an Authorised Financial Services Provider). Corion is driven by a desire to simplify the world of investing and manage a broad range of multi-strategy funds
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