When to re-evaluate your investment?

Staying the course with an investment is generally encouraged, but some warning signals call for a re-evaluation of your fund.

24 May 2024

8 minutes

Paul Hutchinson

The fast view

  • Investors are encouraged to stay the course with an investment unless it was incorrect from the outset or their circumstances have changed.
  • However, it is important to re-evaluate an investment if one or more warning signals are triggered.
  • These include investment team changes, evidence of investment philosophy drift, asset manager corporate action, significant cash flows and luck rather than skill driving returns.
  • Investors also need to consider whether the fund offers value for money, if there is a better alternative to the fund and the offshore capability of the investment manager.
  • Any change should take into account an investor’s overall investment objectives and potential capital gains tax consequences – a qualified financial advisor could assist in re-evaluating existing investments.

Generally, you should not alter your investment strategy or its execution unless it was incorrect at the outset, or your personal or financial circumstances have changed. At crucial points, such as when you get married, have children, get retrenched or retire, we strongly recommend that you consult a qualified financial advisor. Absent such change, the basic rule is: “Do not let shorter-term market fluctuations and negative market commentary sway your commitment to your long-term investment goals.” There is much research that supports the view that investor behaviour is a destroyer of investor returns,1 and that investors should “stay the course”.

There is much research that supports the view that investor behaviour is a destroyer of investor returns, and that investors should “stay the course”.

Having said that, we believe that you should re-evaluate a fund in which you are invested if one of the following warning signals is triggered:

01 Change in the portfolio manager(s) and/or the supporting analyst team

The portfolio manager is the key individual responsible for delivering on the fund’s stated investment objective. Prior to making your investment, you (together with your financial advisor) would have evaluated the portfolio manager’s ability to deliver on the fund’s mandate. A change in portfolio manager necessitates an evaluation of the new portfolio manager’s ability to continue to do so.

In most instances, a portfolio manager is supported by a team of investment analysts. It is likely that these analysts play a significant role in the fund meeting its investment objective over time. Therefore, changes to the analyst team also necessitate the re-evaluation of the fund.

02 Evidence of investment philosophy drift

When selecting a fund to assist you in meeting your long-term investment objectives, you may have done so based on the portfolio manager’s investment philosophy, for example value, growth or momentum-focused. It may be that after a period of underperformance because the investment style has been out of favour (value underperformance comes to mind over most of the past ten or so years), the portfolio manager starts to drift away from the stated investment philosophy. This style drift will likely result in the fund neither meeting its investment objective over time nor fulfilling the role for which you selected it. This should therefore trigger the re-evaluation of the fund.

A fund such as the Ninety One Diversified Income Fund aims to participate when the bond market outperforms cash and protect when the bond market underperforms cash. As illustrated in Figure 1, the Fund has been able to consistently deliver on this objective over time. It is this sort of consistency through various market regimes that is important when considering which funds to include in your portfolio, as you need to be confident that the fund will continue to behave as you expect into the future.

Figure 1: Ninety One Diversified Income Fund: calendar year returns

Figure 1: Ninety One Diversified Income Fund: calendar year returns

Past performance is not a reliable indicator of future results, losses may be made.

Source: Morningstar, dates to 31 December 2023, performance figures above are based on lump sum investment, NAV based, inclusive of all annual management fees, gross income reinvested. Initial charges are not applicable to this fund. Fees are not applicable to market indices, where funds have an international allocation, this is subject to dividend withholding tax, in South African Rand.
*Inception date 01 December 2009.
Annualised performance is the average return per year over the period. Individual investor’s performance may vary depending on actual investment dates. Highest and lowest returns are those achieved during any rolling 12 months over the period specified. Since inception*: Jul-12: 12.8% and Jan-14: 4.1%.
The Fund is actively managed. Any index is shown for illustrative purposes only.

03 Asset manager corporate action

Change in the ownership structure, particularly where the asset manager has been acquired by a third party can be very distracting for all staff, including investment professionals, if not managed correctly. Portfolio managers and investment analysts are only human, and a change in ownership could result in an inward focus. Independent, focused asset managers with significant staff ownership are well aligned to delivering on client expectations through time.

04 A better alternative emerges

While the fund selected may continue to meet its investment objective over time, it may be that a better alternative emerges. It is important then that financial advisors (and their support team/fund selection partner) continue to research the peer group. If an alternative fund consistently delivers better risk-adjusted returns, it may make sense to introduce this fund into your portfolio.

05 Value for money

It is important to ensure that you are sufficiently rewarded over the long term for the fee that you pay. A lower fee may not necessarily be an indicator of a better net return outcome. On the other hand, a higher fee needs to be scrutinised to ensure that you get value for money.

06 Luck rather than skill

When you made the initial investment, your analysis suggested that the portfolio manager had a demonstrable skill. But over time it now appears that, for whatever reason, this outperformance proved to be because of luck not skill. A re-evaluation is warranted given that luck is not enduring through time.

07 Significant cash flows

Significant cash flows in either direction over a short period of time may impact a portfolio manager’s ability to implement their investment philosophy. Monitoring cash flows is therefore important. In this regard, it is also important to understand how concentrated the “ownership” of the fund is, as a fund with a few large investors could be materially impacted should one or more decide to exit.

08 Assets under management

Certain investment philosophies’ ability to deliver outperformance reduces as assets under management grow and portfolios become unwieldy. It is crucial that the asset manager has the discipline to close to new investments and not succumb to greed.

09 Offshore capability

With managers now able to invest up to 45% offshore (in respect of Regulation 28-compliant funds and funds classified by ASISA as South African portfolios2), it is essential that the managers demonstrate excellent, fully integrated investment capabilities, with local and offshore assets managed holistically. While some managers may outsource the offshore holdings in their South African portfolio, we believe it vital they are managed with full oversight by the South African fund’s portfolio manager(s), rather than as a bolt-on portfolio of vanilla assets benchmarked to a global index. Bolt-on, at best, does not enhance the risk/return trade-off and at worst leads to unintended positions within the fund.

10 Material changes to the economic and investment environment

Over time, economies are expansionary and investment markets deliver positive returns, but both may become over-heated. At this point it may make sense to de-risk your portfolio by reducing exposure to high beta funds (funds that follow a momentum investment philosophy, for example) and introducing more defensively-positioned funds (for example, funds that follow a quality investment philosophy). Unfortunately, timing such a move is extremely difficult and therefore it makes sense to include a defensively managed fund to which you maintain exposure through the cycle.

While funds such as the Ninety One Cautious Managed, Opportunity or Global Franchise Funds meaningfully participate in strongly positive markets, they demonstrate the true strength of the Quality team’s approach in sideways-moving and negative markets. The result is that they outperform through the market cycle, as illustrated in Figure 2 of the Ninety One Opportunity Fund. This enduring performance signature has benefited long-term investors.

Figure 2: Ninety One Opportunity Fund - relative strength in sideways to down markets
Average rolling 12-month performance

Figure 2: Ninety One Opportunity Fund - relative strength in sideways to down markets

Past performance should not be taken as a guide to the future, losses may be made. Data is not audited.

Source: Morningstar, 31 December 2023, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, fees are not applicable to market indices, where funds have an international allocation this is subject to dividend withholding tax, in South African Rand. Sector: ASISA SA Multi-Asset High Equity.
Data since May 2000.
Highest and lowest returns are those achieved during any rolling 12 months over the period specified. Jul 05: 43.8% and Feb 09: -15.7%.

Conclusion

While this list is not exhaustive, it provides some warning signals that should trigger the re-evaluation of your current fund holdings. Importantly, any change should be carefully considered in the context of your overall investment objectives and any potential capital gains tax consequences. Again, we would recommend that you consult with a qualified financial advisor.


Download PDF

1 Dalbar’s Quantitative Analysis of Investor Behaviour Study has been analysing investor returns since 1994 and has consistently found that the average investor earns much less than what market indices would suggest. Read more here.
2 ASISA Fund Classification Standard Exemption 25.02.22

Authored by

Paul Hutchinson
Sales Manager

Important information

All information provided is product related and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Ninety One Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.ninetyone.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, RMB, 3 Merchant Place, Ground Floor, Cnr. Fredman and Gwen Streets, Sandton, 2196, tel. (011) 301 6335. A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a collective investment scheme which levies its own charges which could then result in a higher fee structure for the feeder fund. The fund is a sub-fund in the Ninety One Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act. Ninety One SA (Pty) Ltd is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA).

This document is the copyright of Ninety One and its contents may not be re-used without Ninety One’s prior permission. Ninety One Investment Platform (Pty) Ltd and Ninety One SA (Pty) Ltd are authorised financial services providers.