The Nedgroup Investments Best of Breed™ philosophy sees us partner with professional asset managers, who are experts in their field of specialisation, to generate superior long-term performance results for our clients.
Our manager selection process is aimed at identifying managers with a sensible, clearly defined and repeatable process. We tend to favour those managers with a complementary investment philosophy to our own: a focus on producing long-term outperformance rather than (and sometimes at the expense of!) short-term performance.
One measure of the success of the Best of Breed™ philosophy is the quarterly Plexcrown rating, culminating in the prestigious Raging Bull awards each year (with awards based on the December Plexcrown ratings). Over the past decade, Plexcrown has earned a reputation for being one of the leading retail collective investment scheme (CIS) rating agencies in South Africa with their independent, objective ratings.
Qualifying funds need an official track record of at least five years to achieve an individual fund rating. Plexcrown ratings per fund (from one to five, with five being best) are based on a combination of various statistical measures including the Sharpe and Sortino ratios (which provide a measure of a fund’s risk-adjusted return). Funds are ranked on the various metrics with weightings applying to three-year (40%) and five-year (60%) periods. This ensures that funds are rewarded for long-term performance consistency rather than short-term performance, which presents the risk of greater randomness.
Individual fund ratings for a management company are then aggregated into a CIS management company (manco) rating in both the South African and Offshore (foreign FSB-approved funds) categories, provided that the manco meets certain eligibility requirements1.
The size of a fund relative to the combined assets under management (AUM) of all rated funds of a manco in its broad category, is taken into account to determine each funds contribution toward the overall South African manco rating. For example, in the SA Equity & Real Estate category; the Nedgroup Investments Rainmaker Fund with AUM of R16bn (at end December 2015), will contribute a relatively larger proportion to the overall Nedgroup Investments manco rating than the Nedgroup Investments Mining & Resource Fund with AUM of R0.3bn. This weighting of individual fund ratings by its relative size within a manco, ensures that the overall score is more representative of the majority client or investor experience of a manco.
One obvious limitation of the Plexcrown ratings is that it is based on historic data, which similar to historic performance, should not be seen as an indicator of future performance.
How Nedgroup Investments has fared over the years2
The preceeding graph summarises the Nedgroup Investments South African manco3 ratings quarterly since 2006 to end September 2015 (Q4 2015 rankings were not available at the time of writing). For the past seven years, Nedgroup Investments has placed in the top three South African mancos at the annual Raging Bull awards. When measured over quarterly periods, we have been in the top half of peers 90% of the time, and top quartile two-thirds of the time.
During 2006-2008, as the bull market continued unabated, the relative performance of many of our manager partners suffered. In some cases, this caused angst and interrogation of our manager selection process. The Best of Breed™ manager selection process tends to favour managers with a better-than-average ability to protect our clients’ hard-earned capital in volatile markets. A natural consequence of this characteristic is a tendency to lag the market and peer groups in strong, momentum driven markets when investors aren’t being sufficiently compensated for the risks presented.
While relative performance got progressively worse going into 2008, the more defensive positioning of our manager partners was vindicated in the ensuing crash and subsequent recovery: generally speaking across the Nedgroup Investments range, managers avoided a significant portion of the losses in 2008, but harnessed more than their fair share of gains in 2009. Over every quarter since 2009, we have placed consistently in the top four South African mancos in the Plexcrown ratings.
Most recently, during Q1 2015 and Q3 2015, we were awarded first place in the South African manco quarterly rankings. In Q3 2015, we also achieved first place in the Offshore manco ratings, thus attaining first position in both the South African and Offshore categories for the first time. This has only previously been achieved in three out of the last 39 quarters.
Consistency is key
Market participants often give undue credence to performance tables of funds carried out at a point in time. Although the returns in the performance tables may be for longer periods: three, five or 10-year periods, they still represent a ‘point-in-time’ snapshot of a fund’s performance, with little attention paid to the consistency of returns delivered over time. The limitation of a point-in-time analysis is that it provides no indication of how a fund performs over time, through full market cycles, or any indication as to how persistent such out- or under-performance may be.
A more worthwhile measure is one that incorporates the consistency of performance. And, one approach is to measure the success rate of outperforming the benchmark or peer group over appropriate rolling measurement periods, as opposed to singular, point-in-time estimates.
Our research and experience suggests that funds that are positioned to perform suitably well in a range of outcomes tend to fare better over the long-term than those that periodically shoot the lights out. The outcome for the latter group tends to be more binary in nature – at times either best or worst in the peer group universe – with lower consistency in attaining either result over time.
At Nedgroup Investments we continually test and review our investment offering as well as our fund managers with the aim of bringing our investors the most appropriate investment choices available. We dedicate considerable time and resources to understanding the process and philosophy of our fund managers, and testing our conviction in their ability. This is equally important when they are doing well as when they are doing poorly. We believe that the consistency of the performance of our overall range is evidence of the success of our process over time.
1 For full detail on Plexcrown’s methodology for fund and MANCO ratings visit www.Plexcrown.co.za
2 The Plexcrown ratings methodology has been revised and improved over time.
3 South African ratings include all qualifying rand-denominated funds, including feeder funds.