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A few weeks back I interviewed the chief executive officer of an asset management firm who bragged that his analysts ignored the news and conducted their own research into companies. This is the same comment I have heard repeatedly over the years from other investment professionals who pride themselves on superior stock-picking abilities.
The African Bank Investments Ltd (Abil) saga is a reminder that some of these so-called experts can be too clever for their own good. And that the jargon they throw around and complicated spreadsheets and graphs they pull together – all to impress us, the unit trust fund clients – are no real reflection of whether they can actually consistently make sound investment decisions.
It didn’t take a rocket scientist, or even someone with a string of business and finance degrees behind their name, to realise that Abil was in trouble. All it needed was a passing interest in the news headlines for an investor to know that ploughing big money into Abil shares was high risk.
A little more than a cursory reading of the news would have thrown up some interesting facts to ponder. This time last year, Abil’s failure to get Ellerines furniture stores back into shape was making the headlines. It needed to issue more shares to plug a hole in its finances and get out of trouble.
Perhaps if these highly paid professionals had bothered to drive down to the neighbourhoods where Abil’s customers live they would have had a sense of the market dynamics that this bank was caught up in. South African consumers are struggling and excessive rates charged by unsecured lenders have driven large numbers of them into a deep pit of debt from which there is no apparent return.
This is hard to imagine, perhaps, when you are on a salary and bonus of hundreds of thousands of rands, and quite often millions of rands. However, the economic indicators and analysis – covered in the media – would have provided some clues.
Even if these unit trust managers had decided to cocoon themselves from the noise of the real world because they believe so much of this external information is rubbish, there is still no excuse for not noticing that Abil was a gamble. The numbers in the financial statements would surely have told them that?
This week some of South Africa’s star fund managers have been busy explaining their decisions to buy Abil. As a unit trust client of one of those companies*, I can’t help pondering whether the so-called experts forget that it is not their own money they are playing with in that big casino called financial markets. Other investors must be wondering the same thing.
Coronation Asset Management’s chief investment officer Karl Leinberg and senior portfolio manager Neville Chester spoke of being sorry and humbled for taking such a large bet on Abil. These are the fund managers who panicked last week and played a key role in driving the share price down as they offloaded Abil.
Coronation’s unit trust clients were still left holding about 8% of Abil when the authorities called a halt to trading ahead of an announcement of a bail-out.
Then there is Allan Gray, which bought the shares as Abil got cheaper. It used a post-mortem of its decision to buy Abil as it was going down the tubes as an opportunity to squeeze in a marketing punt about its investment prowess.
There was nothing humble about Allan Gray’s explanation for its Abil stock purchases last week. It said:
“Our investment in the ordinary shares has detracted from fund returns, but fortunately the position size was limited by our peer review investment process. We will always have winning and losing positions. We aim to have more exposure to bigger winners, and to limit our exposure to losers so that the winners outweigh the losers. The net result is reflected in our funds’ total returns.”
BizNews commentator David Shapiro is not fooled. He told BizNews publisher Alec Hogg on BizNews radio in a discussion about Allan Gray’s Abil buying spree that Abil has “caught many speculators”. He said it was “rather odd” that Allan Gray, known as a cautious investor, bet on Abil last week.
These are all fund managers who have spoken over the years about their detailed research and rigorous internal debates that precede investment decisions. They claim to guard against paying too much attention to what is going on in the world yet they were in the herd that got swept up in the Abil trading madness.
Shapiro said he hasn’t seen such frenzied trading activity since around the time of the Lehman Brothers collapse in 2008.
The dust will settle on Abil and these fund managers will no doubt continue to promote their expertise to unit trust investors. However, the investment market is changing. It is not impossible the Allan Grays and Coronations of this world are going to find it harder to drum up support.
Actively managed unit trusts are becoming more challenging to sell as investors wise up to their disadvantages and other attractive investment opportunities open up.
There are new, lower cost passive unit trusts available, for example. These are unit trust funds that follow indices in an automatic way instead of hiring investment professionals to choose shares to buy and sell.
If a company like Abil is in the basket of shares your fund is tracking, you will get hit as an investor in a passive fund. But no worse than if you were in a large Allan Gray or a Coronation fund.
And, in a passive fund, you will save money because you won’t be paying higher fees to a fund manager to make bad calls. In the long run, lower fees mean higher returns.
Which horse are you going to back the next time you are in the market for a unit trust fund? –
* Disclosure: Jackie Cameron holds Allan Gray unit trusts.
— Craig Gradidge (@gradidgec) August 18, 2014
— Kaveer Beharee (@Ubiquity_ZA) August 18, 2014
— Inkunzi Investments (@OwenNkomo) August 18, 2014
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