What are the Big Guns’ favourite stock preferences?

Many readers may be quick to point out that the pockets funding these teams’ successes run deep, and if the richer Currie Cup teams didn’t buy all the good Cheetah players every year, they would actually dominate the tournament. I won’t argue with that. But the truth is that these successful teams were built through hard work over many years and became financially stronger, which placed them in a position to afford better management, support, resources and players. Does winning one tournament guarantee you another win next year? Absolutely not. As an avid WP and Ferrari supporter, I have learnt this the hard way over many years.

No different to sports teams, well-known investment management teams have, through years of success, built solid management teams, gained tremendous support and optimised their resources. It’s unlikely that any two investment companies will follow the exact same strategy, and the ugly truth is that if one’s strategy isn’t successful in a particular year, they will have some difficulty outperforming their peers and their benchmarks. Good strategies and, more importantly, good processes keep the winning teams on top over the longer-term.

When searching for winning investment managers, I look for the same qualities as those of any successful sports team: performance, consistency, and to what degree they fail when things don’t go their way.

Performance

For me, performance is about one thing, and to quote Jerry Maguire in the 1996 film of the same name, that is, “Show me the money!” I look at how a particular fund performed over the last three-year, five-year and ten-year periods. Note that this shouldn’t form the basis of your decision to choose specific funds. The problem is that last year’s winners don’t always end up on the podium again the following year. To illustrate my point, let’s use the Formula 1 Constructor standings over the past 12 years as an example. By looking at the 12-year “returns”, you will see that Red Bull was last year’s winning team and had managed to do so five times over these 12 years. However, they also struggled to keep up with the competition eight times between 2014 and 2021 while being dominated by Mercedes.

Consistency

Part of measuring a team’s success is how consistent their monthly performance is. By using the Formula 1 example again, this would be the equivalent of evaluating a team’s performance on a race-by-race basis. Here, I usually look at a fund’s 10-year monthly return by comparing it to its own benchmark and the performance of its peers. I will for example give preference to an equity fund manager that manages to outperform the FTSE/JSE All Share Index 75 times over a 120-month period, over a fund that’s ahead on a three-, five- or ten-year return basis, but only manage to outperform 50 times.

Risk

Next, I will examine what a fund does when everything goes wrong. This means that when your “protea” is no longer in bloom, we have to ensure that it doesn’t completely wither and die. This is where I compare fund managers’ volatility, drawdowns, and Sharpe and Sortino ratios. I firmly believe that if a fund manager can manage risk well, it helps to aid a healthy sleep cycle.

Without highlighting any names in particular, I applied this three-point strategy to all SA General Equity funds with a size of R1 billion or more, combined with a return history of at least ten years. The graph below clearly illustrates that the average returns of the top 10 funds didn’t only outperform the FTSE/JSE All Share Index over different periods but that they managed to do so consistently.

Graph: Average monthly returns of the top 10 SA General Equity funds vs FTSE/JSE All Share Total Return

source: Refinitiv Eikon

I took things one step further by consulting the December 2022 minimum disclosure documents (a.k.a. fact sheets) of the top 10 funds for the most used shares in their respective compositions. The most used shares are listed below, with the total number of times the top 10 funds used them in brackets:

Anglo American (9)
Implats (7)
ABSA (6)
BATS (6)
Naspers (6)
Sasol (6)
Standard Bank (6)
Glencore (5)
MTN (5)
FirstRand (4)
Northam Plats (4)
Prosus (4)
Richemont (4)

Personally, I don’t think there are many big surprises left in shares for the time being because, in the same way the top sports teams have proven themselves worthy as champions over the years, so too have the top investment management companies. However, I would like to emphasise the phrase “over the years” because this highlights the need to keep your emotions at bay, to be patient and invest with a long-term vision, and, most important of all, to diversify your portfolio, as it remains your best investment strategy.

The opinions expressed in this article document are the opinions of the writer and not necessarily those of PSG. The information in this article is provided as general information. It does not constitute financial, tax, legal or investment advice and the PSG Konsult Group of Companies does not guarantee its suitability or potential value. Since individual needs and risk profiles differ, we suggest you consult your qualified financial adviser, if needed.

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