Awards recognise past performance…nothing else

Performance awards across the asset management industry in South Africa have a long and prestigious history. For many years the best performing funds and asset managers have been recognised through awards such as Raging Bull– arguably the most well-known in the industry – and global investment data provider, Morningstar.

These awards typically recognise performance over various periods and are measured in different ways – generally either straight-line or risk-adjusted performance, or some iteration thereof. The point is that each of these bodies define the categories, measurement criteria and calculation methodology – either open and available to the public, or proprietary. They set the rules on how different funds from asset managers are assessed and rated.

As these awards gathered greater awareness, recognition and prominence, there have been critics of the methodologies, calculations or even the bodies themselves. Despite this, the ‘rules of the game’ of each body have broadly remained intact. The very nature of performance awards is to recognise past performance, which we all know is impacted by many things including market cycles, investment philosophies, styles etc.

Important to reward and recognise good performance

As sophisticated investors, we understand and realise that we cannot use these awards as a proxy for future performance – because we simply do not know what investment markets will look like tomorrow. In our role as Discretionary Fund Manager (DFM) or multi-manager, we need to understand these asset managers and blend them to achieve a more palatable performance profile for clients. Despite this, we have seen that many – but not all – end investors and their advisers place a high value on past performance and awards as the main ingredient for constructing portfolios. We often see advisers using the previous year’s winners as the recipe for tomorrow’s client portfolios. This is a strategy that is almost always bound to fail. But it should not be a reason to not recognise great performance. In fact, as an industry we need to up the ante on education to clients and advisers around the role of past performance in portfolio construction, but also continue to acknowledge good performance.

First DFM awards launched…despite the challenges

The reason bodies such as Raging Bull, Morningstar and Citywire can award asset managers is because the performance data that they get measured on is transparent, publicly available and frequently published. This is due to the fact that the performance standards and reporting of collective investment schemes (CIS) – unit trusts – is regulated. This makes performance measurement and comparison between various funds rather simple. Matters are slightly more complicated in the DFM world. Performance measurement is not as straight forward because most DFMs do not manage their own CISs and instead, use model portfolios to execute on their investment views. In fact, according to the latest NMG research, more than 80% of DFMs use models as their main investment vehicle. This is great because model portfolios allow for the very things that have allowed the DFM industry to explode over the last decade – estimations of total assets under management of around R450 billion (Collaborative Exchange DFM Survey 2021).

This includes portfolio customisation, co-branding of collateral including fact sheets, adviser involvement in investment committee meetings etc. While not all DFMs have the same proposition for advisers and clients, most of them have some view of aligning to the advice process of the adviser and the needs of the client. The problem, however, is that measuring performance of these model portfolios is very difficult. At present there are no industry performance measurement standards, disclosure standards etc, despite the need for this being well recognised and supported by most DFMs and industry stakeholders i.e. advisers and asset managers.

It therefore came as no surprise when London-based Citywire, a financial publishing and information group, launched its inaugural annual awards for the local DFM industry in 2022. A truly historic moment in our relatively young DFM industry.

Sour grapes or not?

The aim of the Citywire awards is to qualitatively recognise DFM service by asking advisers, that make use of a DFM, to rate abilities such as investment proposition, technology etc and then to quantitatively recognise investment performance by using performance numbers provided by the DFM either from:

1. Model portfolios managed on LISP platforms – verified by the LISP platform, or
2. CISs (unit trusts) managed by the DFM.

Participation is always voluntary – all DFMs know and understand the rules of the game. It could be argued that the service award is subjective, but that the performance awards are objective. The big ‘improvement’, if you want to use the word, is that advisers and clients are now for the first time, in a position to make some sort of comparison between the various DFMs in our local market.

We are moving to a place of better transparency in performance reporting of DFMs. But the backlash following the first year of DFM awards has been disappointing. There has been both public and ‘behind closed doors’ criticism of the awards and the methodology and calculations. In other words, the ‘rules of the game’ have been criticised after entering but not winning.

This is akin to playing a rugby match, knowing the rules, losing the game – and then complaining afterwards that the rules are rubbish because they did not favour their desired outcome.

We have heard competitors say that a DFM’s main responsibility is not performance – which is just outrageous. If our role as DFMs is not to deliver exceptional performance after fees, then what is it? I would argue that investment performance is a hygiene factor and that everything else in a good DFM proposition are value adds – enhancing the adviser value proposition, investment tools, collateral, fact sheets, co-branding etc. But delivering performance is, and always should be priority. Achieve performance hurdles and benchmarks over relevant time horizons and then, rightfully award those that consistently outperform relative to peers.

DFMs to play ball…submit your returns

Despite the complaints – and a few strange views on performance – most of the DFMs participated. There are a few well-known DFMs that for some or other reason did not participate. Why would a firm managing money not be prepared to disclose performance? Especially in light of the fact that we live in a world where transparency has become non-negotiable. Whilst INN8 Invest won the first ever DFM overall performance awards – which we are super proud of – we continue to be part of a movement pushing towards greater transparency in DFM performance standards and reporting.

Conclusion

It is important that we continue to recognise excellent performance in the DFM industry. Hence the reason we will continue to participate in awards even if we do not win this year or the next. We plan to be a strong voice on important industry topics, even the uncomfortable ones such as performance transparency. Why? Because it is the right thing to do. Clients deserve it. Advisers deserve it. Those working tireless to produce outperformance for clients and advisers deserve it.