We all love awards. We love the pomp and ceremony. We love the recognition by our peers. We love being able to provide our clients with that independent and expert assessment of our excellence in investments. But should we rely on them?
Many of us will have heard of our local awards through the media or marketing. But do we know what they represent in terms of investment excellence? Some of the more prominent awards are the following.
Raging Bull Awards
‘Eight awards are given to the top-performing funds in the unit trust sectors that attract the most money from investors; these funds include foreign-domiciled funds that have been approved by the Financial Services Board (FSB) as suitable for South African investors.
‘Four of these eight awards are made on the basis of outright (straight) performance over the past three years; the other four awards are made on the basis of risk-adjusted performance as measured by the PlexCrown ratings, which take into account the consistency of performance over periods up to five years.
‘The most coveted award, for the South African Management Company of the Year, is made on the basis of an average PlexCrown rating that measures risk-adjusted returns and consistency of performance across all of a manager’s qualifying funds for periods up to five years.’
‘The annual Morningstar South Africa Fund Awards recognise funds and fund houses that added the most value for investors within the context of their relevant peer group in 2016 and over longer time periods.
‘Morningstar selects the finalists using a quantitative methodology with a qualitative overlay that considers the one-, three-, and five-year performance history of all eligible funds, and adjusts returns for risk using Morningstar Risk, a measure that imposes a higher penalty for downside variation in a fund’s return than it does for upside volatility.’
Do you rely on the awards?
There is no doubt that the expertise and sophistication in research and methodology provide a strong case to understand the awards, as well as what they mean in the selection of your investment managers. Persistency, quality and long-term objectives are increasingly important.
The S&P Dow Jones Persistence Scorecard (June 2014) states: ‘An inverse relationship exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that no large-cap or mid-cap funds managed to remain in the top quartile at the end of the five-year measurement period.’
WHAT SHOULD YOU DO?
- Read widely and understand the ratings as part of your decision-making framework.
- Choose investments that meet your benchmarks for both returns and volatility over agreed time horizons.
- Use experts to construct a balanced investment portfolio, selecting the right asset classes and best of breed managers in the right combination, and then to assess and monitor delivery against your benchmarks.
There’s no point in choosing the winning fund if it doesn’t meet your objectives.
Mike Lledo CA(SA) is an Associate of Citadel Investment Services