Creating wealth for clients
It has been a volatile time in the markets, following a five-year period of disappointing equity returns. At times like these, it is understandable for investors to question both their investments and their investment manager. Allan Gray Namibia’s head of retail business, Etienne le Roux, discusses key considerations when evaluating...
B7: What is Allan Gray Namibia’s approach to investment management?
ELR: Investment management is a business of people. Having the right people, providing them with the infrastructure to accumulate insights, and putting them in the right positions to make independently considered decisions are crucial for the effective implementation of an investment philosophy and process.
At Allan Gray, we are on our sixth generation of senior investment professionals. Our ability to train new generations of investment decision-makers and effectively manage succession has played a significant role in our ability to replicate our performance track record.
Another key element of trust is alignment of interests. We think clients should ask whether the investment manager itself is structured to prioritise client outcomes and interests. Investors often focus their evaluations exclusively on the investment process, but we believe a company’s structure and ownership are also critical.
We all know that self-interest is an inherent survival mechanism. It is therefore important that an investment manager’s organisational structure is designed to ensure real alignment between its interests and those of its clients.
B7: What does Allan Gray consider to be its purpose as an investment management firm?
ELR: For the past 47 years our purpose is creating wealth for our clients. We take the responsibility of looking after our clients’ hard-earned savings very seriously.
B7: What factors should investors consider when looking for a trustworthy asset manager?
ELR: Often investors tend to look at performance first, by considering the past performance of an asset manager and whether they can potentially expect similar returns going forward. There are other considerations though that are important, such as the asset manager’s approach to investing.
B7: What is Allan Gray’s approach to investing in order to fulfil its purpose?
ELR: It is quite simple: we buy shares that we think is undervalued and sell them when we think they have reached their worth. We do this regardless of popular opinion as we are mindful that it is hard to outperform if you simply follow the herd.
One of the factors you should evaluate is whether we have a track record of staying committed to our philosophy through various cycles and delivering alpha over long periods of time, notwithstanding shorter-term periods when this may not be achieved.
B7: What sets Allan Gray’s approach apart from other investment managers?
ELR: Our approach might seem simple and is probably not unique, but we apply this approach regardless of popular opinion as we are mindful that it is hard to outperform if you simply follow the herd. Our proven ability to apply it consistently and free from short-term pressures is something we believe sets us apart.
B7: Can investors trust Allan Gray to deliver on our purpose?
ELR: Again, we do not take lightly the trust clients have placed in us to grow their savings. While periods of underperformance can be testing, we hope that our consistent approach and long-term track record will provide the necessary conviction and “proof” points that we can weather the short-term storms and our clients can enjoy the full benefits of what we believe our approach can deliver.
B7: What do investors trust their asset managers to do?
ELR: Once you have established your personal goals and objectives, before committing to any new investment, you should ensure you are clear on what you expect from both your chosen manager and your fund. Your expectations of your fund should be directly informed by the stated objectives of the fund.
Every fund has a minimum disclosure document or fund factsheet. This document contains key information about the fund, including its mandate and objective. Typically, this objective will detail the fund’s benchmark, time horizon and risk positioning.
Let’s take the Allan Gray Namibia Balanced Fund as an example. The following information from its objective will help you to identify what to expect.
Fund return expectations
Actively managed funds aim to deliver better returns, net of relevant fees, than their selected benchmarks. The Balanced Fund aims to perform better than the average performance of similar funds in Namibia.
When a fund outperforms its benchmark, we call this positive difference in performance “alpha”. Over the last 21 years, the Balanced Fund returned nearly 3% per annum more than the average fund in the Balanced Fund’s sector. Absolute and relative returns in the future may not be as good as in the past, but this is a useful starting reference point for your return expectations.
Risk measures
Return expectations are closely linked to risk considerations. You will typically need to take on more risk in pursuit of higher returns. At Allan Gray, we think the most important measure of risk is the risk of permanent capital loss.
As a prospective investor, we therefore believe it is important to view the maximum drawdown (the maximum loss from peak to trough) a fund has experienced, or the lowest annual return. These measures should be considered alongside the time it has taken to recover.
The lowest annual return of the Balanced Fund, for example, was -5%(for the 12 months ending April 2009 ), which compares to the market of -19% (for the 12 months ending February 2009). Ideally, a fund should experience a lower average drawdown than the market and recover more quickly. The factsheet will also include measures like volatility, which is the monthly variance in return relative to the average.
Time horizon
This is the minimum amount of time that an investor should remain invested in a fund, and should be seen as a reasonable period over which to assess whether the fund has delivered on its objective. The Balanced Fund aims to deliver returns in excess of its benchmark with lower risk of loss over periods of more than three years.
This doesn’t mean that the Balanced Fund will beat its benchmark over its time horizon every single month. Many successful funds will have periods when they underperform significantly. The key is to make your assessment over sufficiently long and representative periods.
B7: How do you know if you can trust your manager to deliver?
ELR: Let’s say your favourite sporting team won the title in 2019. No matter how much you wish and hope they replicate this result in 2020, you have no guarantee that they will.
However, there are certain inputs they can replicate which they know have been successful in the past: selection, training, nutrition, and so on. So even though they can’t guarantee the result, they can be consistent in their previously successful inputs and trust that they will deliver the best possible outcome, as they have in the past.
Likewise, we at Allan Gray lean heavily on our experience of investing on behalf of clients since 1974. In investments, performance is the outcome. For this reason, rather than evaluating performance on its own, there is merit in evaluating our commitment to the inputs – the “engine” – that produce this performance, specifically our philosophy, investment processes and people. Our investment philosophy and process have remained the same since 1974 and we shall continue to apply it to the benefit of our clients.
ELR: Investment management is a business of people. Having the right people, providing them with the infrastructure to accumulate insights, and putting them in the right positions to make independently considered decisions are crucial for the effective implementation of an investment philosophy and process.
At Allan Gray, we are on our sixth generation of senior investment professionals. Our ability to train new generations of investment decision-makers and effectively manage succession has played a significant role in our ability to replicate our performance track record.
Another key element of trust is alignment of interests. We think clients should ask whether the investment manager itself is structured to prioritise client outcomes and interests. Investors often focus their evaluations exclusively on the investment process, but we believe a company’s structure and ownership are also critical.
We all know that self-interest is an inherent survival mechanism. It is therefore important that an investment manager’s organisational structure is designed to ensure real alignment between its interests and those of its clients.
B7: What does Allan Gray consider to be its purpose as an investment management firm?
ELR: For the past 47 years our purpose is creating wealth for our clients. We take the responsibility of looking after our clients’ hard-earned savings very seriously.
B7: What factors should investors consider when looking for a trustworthy asset manager?
ELR: Often investors tend to look at performance first, by considering the past performance of an asset manager and whether they can potentially expect similar returns going forward. There are other considerations though that are important, such as the asset manager’s approach to investing.
B7: What is Allan Gray’s approach to investing in order to fulfil its purpose?
ELR: It is quite simple: we buy shares that we think is undervalued and sell them when we think they have reached their worth. We do this regardless of popular opinion as we are mindful that it is hard to outperform if you simply follow the herd.
One of the factors you should evaluate is whether we have a track record of staying committed to our philosophy through various cycles and delivering alpha over long periods of time, notwithstanding shorter-term periods when this may not be achieved.
B7: What sets Allan Gray’s approach apart from other investment managers?
ELR: Our approach might seem simple and is probably not unique, but we apply this approach regardless of popular opinion as we are mindful that it is hard to outperform if you simply follow the herd. Our proven ability to apply it consistently and free from short-term pressures is something we believe sets us apart.
B7: Can investors trust Allan Gray to deliver on our purpose?
ELR: Again, we do not take lightly the trust clients have placed in us to grow their savings. While periods of underperformance can be testing, we hope that our consistent approach and long-term track record will provide the necessary conviction and “proof” points that we can weather the short-term storms and our clients can enjoy the full benefits of what we believe our approach can deliver.
B7: What do investors trust their asset managers to do?
ELR: Once you have established your personal goals and objectives, before committing to any new investment, you should ensure you are clear on what you expect from both your chosen manager and your fund. Your expectations of your fund should be directly informed by the stated objectives of the fund.
Every fund has a minimum disclosure document or fund factsheet. This document contains key information about the fund, including its mandate and objective. Typically, this objective will detail the fund’s benchmark, time horizon and risk positioning.
Let’s take the Allan Gray Namibia Balanced Fund as an example. The following information from its objective will help you to identify what to expect.
Fund return expectations
Actively managed funds aim to deliver better returns, net of relevant fees, than their selected benchmarks. The Balanced Fund aims to perform better than the average performance of similar funds in Namibia.
When a fund outperforms its benchmark, we call this positive difference in performance “alpha”. Over the last 21 years, the Balanced Fund returned nearly 3% per annum more than the average fund in the Balanced Fund’s sector. Absolute and relative returns in the future may not be as good as in the past, but this is a useful starting reference point for your return expectations.
Risk measures
Return expectations are closely linked to risk considerations. You will typically need to take on more risk in pursuit of higher returns. At Allan Gray, we think the most important measure of risk is the risk of permanent capital loss.
As a prospective investor, we therefore believe it is important to view the maximum drawdown (the maximum loss from peak to trough) a fund has experienced, or the lowest annual return. These measures should be considered alongside the time it has taken to recover.
The lowest annual return of the Balanced Fund, for example, was -5%(for the 12 months ending April 2009 ), which compares to the market of -19% (for the 12 months ending February 2009). Ideally, a fund should experience a lower average drawdown than the market and recover more quickly. The factsheet will also include measures like volatility, which is the monthly variance in return relative to the average.
Time horizon
This is the minimum amount of time that an investor should remain invested in a fund, and should be seen as a reasonable period over which to assess whether the fund has delivered on its objective. The Balanced Fund aims to deliver returns in excess of its benchmark with lower risk of loss over periods of more than three years.
This doesn’t mean that the Balanced Fund will beat its benchmark over its time horizon every single month. Many successful funds will have periods when they underperform significantly. The key is to make your assessment over sufficiently long and representative periods.
B7: How do you know if you can trust your manager to deliver?
ELR: Let’s say your favourite sporting team won the title in 2019. No matter how much you wish and hope they replicate this result in 2020, you have no guarantee that they will.
However, there are certain inputs they can replicate which they know have been successful in the past: selection, training, nutrition, and so on. So even though they can’t guarantee the result, they can be consistent in their previously successful inputs and trust that they will deliver the best possible outcome, as they have in the past.
Likewise, we at Allan Gray lean heavily on our experience of investing on behalf of clients since 1974. In investments, performance is the outcome. For this reason, rather than evaluating performance on its own, there is merit in evaluating our commitment to the inputs – the “engine” – that produce this performance, specifically our philosophy, investment processes and people. Our investment philosophy and process have remained the same since 1974 and we shall continue to apply it to the benefit of our clients.
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