01 Have a clear investment philosophy and process
Investing successfully over meaningful periods demands you have a well-defined philosophy and process. The key is finding a process that works and sticking to it. Chasing your tail will only result in disaster. Being disciplined is crucial, particularly through periods of performance pressure.
It is interesting to note that Ninety One has two of only four managers that have been managing multi-asset portfolios in South Africa for more than 20 years, both of which are on the performance podium over that period. The longevity of our multi-asset funds are testimony to our investment teams having clear investment philosophies and processes, and remaining disciplined through market cycles.
02 Investments do not simply live on spreadsheets
While you need a solid knowledge of statistics and financial accounts to value assets, understanding the psychology of markets and investor behaviour is also key to maximising investment success. Spend equal time studying history, economics, psychology and accountancy.
History helps us make sense of countries’ policy regimes over time and the factors that shape the global macroeconomic environment. The monetary and fiscal policies of the major economies have a material impact on global financial markets. If you don’t understand the history behind certain markets, you won’t appreciate why asset prices don’t always revert to their long-term mean or average level. It also helps provide a guide on the patterns markets display.
03 Align temperament, intellect and experience
Temperament is incredibly important in fund management because, ultimately, it determines how you behave in difficult circumstances. Maintaining an even temperament is particularly important when you face a situation with a highly uncertain outcome. Pundits reading the tea leaves would have you believe they have the answers, but the reality is we invest in a highly unpredictable and fluid world. Forecasting doesn’t work.
When you think about any investment decision, the first question you must ask yourself is, what edge do I have? Secondly, you need to consider whether you have superior insight based on the work you have done. And lastly, have I seen this before?
04 Things go wrong – learn from your mistakes
I wish I could say that every single investment our team has made in the last 21 years of the Ninety One Opportunity Fund has been a success, but that isn’t the case. You need to accept when you are wrong, know how much money you have lost, and importantly, learn from your investment mistakes.
Avoid falling in love with a stock, sticking to losers for too long or investing before doing a proper assessment of the investment case. Limit losses, take justified position sizes and don’t take inappropriate risk – leaving room for error allows you to stay in the game after shocks.
It is interesting to note that the top ten contributors within the offshore component of the Opportunity Fund have contributed 88% of the fund’s performance of the offshore carve-out in the last 5 years. The bottom ten stocks have only detracted 7% from the overall offshore performance (as at 31 March 2024). So, importantly, there is a positive asymmetry – the realised investment gain (reward) is much greater than the realised loss.
05 Have a differentiated position
How do you deliver results and generate outperformance? You need to be an early holder of a different investment idea that, ultimately, contributes to the portfolio. It’s one of the key tenets that drives an active manager’s ability to outperform. Being different just for the sake of it, doesn’t generally lead to desirable outcomes for investors.
We were meaningful global equity investors in the Opportunity Fund long before it became more of a consensus view. While the average manager’s exposure to global equities has crept up in recent years, the composition looks very different to our underlying stock selection. We believe differentiation in global equities will become increasingly important for South African investors.
06 Be curious, even sceptical, but not cynical
You have to be curious to find different ideas, but this can lead you down many a dark path, so it’s important you hold a healthy dose of scepticism. It’s also important to differentiate between scepticism and cynicism. If you are cynical about an idea, you will make mistakes because your view will remain fixed – no matter what evidence is produced. On the other hand, if you blindly believe every great ‘investment story’, you will also make mistakes because you need to assess whether those stories are based on facts.
Our investment team is firmly in the camp of sceptics, as opposed to cynics. Healthy scepticism means we keep an open mind on potential investments. We believe that if we have done sufficient work, we should have the opportunity to change our minds.
07The best ‘investment stories’ carry the highest potential to lose money
There is no shortage of good ‘storytellers’ in the investment industry. Unfortunately, many of these investment stories could see an investor lose a lot of money. These stories are often used to support a particular agenda. Don’t chase the popular narrative. You may find yourself backpedalling when the story unwinds.
08 If you can’t value an asset, you can’t quantify risk
Markets move through different stages – at times, valuations don’t seem to matter, and undue exuberance sets in. Eventually though, fundamentals will start driving the broader market again. This leaves investors who own assets that they can’t value exposed to sharp market corrections. If you own something that you can’t value, you have no idea what the risk of losing money is. There are countless examples of this in the world of cryptocurrencies.
Stocks, bonds and property all deliver cash flows, which make them easier to value. That is why we include them in our portfolios, when there is a good investment case to be made. Currencies are equally important to understand if you want to be successful in managing multi-asset portfolios for South African clients. You can value currencies using models applying purchasing power parity and capital flows.
09 Don’t confuse luck with skill
When things go well, many investors attribute it to their skill and when that same share goes down, they feel they were unlucky. Sometimes, luck, not skill can result in a payout. Luck isn’t usually repeatable. So, from an investment perspective, focus on what you can repeat and don’t place too much emphasis on outliers – there’s likely to be an element of luck you can’t duplicate.
10 Take risk. Manage risk.
With so much focus on negative headlines, it often feels like it’s prudent to be negative. When it comes to investing, however, negativity rarely proves to be a sound decision. Over time, you can’t avoid investment risk because you simply won’t create real wealth. Hiding in a perceived ‘safe harbour’ will lose value over time as inflation erodes the purchasing power of your hard-earned savings. For more than 20 years, our Quality investment team has been managing multi-asset portfolios that have the dual objective of outperforming inflation over time and minimising the risk of a permanent loss of capital.
We have managed to achieve these objectives by compounding returns based on sound investment decisions. This has led to a relatively smooth performance profile by investing in high-quality companies with sustainable earnings, stable cash flows and valuations that are reasonable.
Conclusion
Over the long term, markets go up but not in a straight line. Balancing risk and return remains the cornerstone of successful investing. We continue to seek differentiated investment ideas to generate long-term wealth for our clients. There are no shortcuts when you want to achieve sustainable returns over time. We uncover good investment ideas by doing our homework and remaining disciplined investors. A few areas of the market that receive most of today’s attention look extended, but we continue to find compelling investment ideas for our portfolios.
Best moderate allocation fund*
*Awarded 14.03.24. Award details available on request.
