Active managers are underperforming but now is not the right time to sell out, believes Nina Saad, head of portfolio management, Investment Solutions. She argues that bailing now will only realise, or lock in, current underperformance. In the worst case scenario active managers will continue to perform poorly for some time to come. However, she reminds investors that the market will turn. “The trick is not to panic and lock in current losses, but rather to keep the faith despite tough times,” she said.
Active fund managers regularly restructure funds to take advantage of volatility and inefficient pricing in the market, while versus passive managers simply track an index that is representative of available investments.
So what went wrong?
Saad explained that active managers had gone overweight resources, perhaps too early. However, due to their attractive valuation underpin, macros continue to work against this position as resources become even cheaper. Looked at over the last ten years, however, South African fund managers, en masse, going overweight resources is an extremely rare event. This means that “active fund managers need to stick to their current positions until the macros change and performance returns” adds Saad.
When will the macros change?
Saad believes one of the catalysts will be when foreign active fund managers, who have bought heavily into the emerging market consumer theme, start abandoning their retail positions. When this happens, “a lot of the alpha pent up in current active portfolios will be unlocked,” predicts Saad.
The immediate risk in maintaining current positions is poor relative performance in the short term. This may well prove difficult for the smaller asset management businesses, if investors bail too early. “The larger houses – or businesses that don’t have concentrated client lists dominated by one or two very large clients, however – will do well to weather the storm and stay the course,” says Saad.