Laura du Preez | 17 March 2025
Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.
Picking a fund manager who manages risk can help you avoid making costly investment decisions.
Risk management can also enhance returns, managers argued at the recent Investment Forum conference where leading asset managers address financial advisers on topical investment issues. The conference is held annually in Cape Town and in Gauteng - this year at Sun City.
Ideally you should get help from a financial adviser to determine your financial needs and the appropriate fund or portfolio you need to help you achieve your goals. Your fund manager should then deliver the best returns it can within the chosen fund, Brandon Zietsman, chief executive officer of PortfolioMetrix told the conference.
The problem is investors do not stick with the strategy that is suitable for them.
Markets trigger all our basic instincts, because they are volatile, unpredictable, and at times irrational, Zietsman said. And we filter information through our beliefs, our emotions and our own experiences. This results in poor assessments of risk and most investors worry about the wrong things, Zietsman said.
During market downturns, investors respond emotionally and make the worst decisions at the worst time, he said.
Poorly timed decisions to switch funds leads to what is known as a behaviour tax and a gap between what funds return and what investors earn as returns. According the 2024 Mind the Gap report by fund rating agency Morningstar, US investors’ returns are on average 1.1 percentage point lower than the average fund returns due to this behaviour tax.
Zietsman says investors often agonise over fees but a behaviour tax of one percentage point a year can result in a 30 to 40 percent shortfall in savings when saving for a long-term goal such as retirement.
Locally Momentum Investments’ latest SciFi report into how investors using the Momentum Investment behave in response to market conditions, shows that investors switch funds on average 1.9 times a year. But last year as the US markets climbed higher, the number of switches increased to an average of 2.3 times.
This cost investors “a staggering” average of 3.5 percentage points of the investment returns they could have earned had they not switched and wiped R65 million from investors’ portfolios, Zietsman said.
When investors make use of funds that follow a particular style, invest according to a theme or are invested in a narrow sector, the behaviour tax increases up to three times compared to funds that invest more broadly, because these funds are more volatile, Zietsman says.
The SciFi report highlights the highest outflows from funds on the platform during 2023. Many of them delivered single digit returns that year but the following year these funds delivered a double-digit return – costing investors who ditched them anything from two to 14 percentage points in return.
It also shows how investors chose funds after they had delivered their best returns. For example, the report says the Satrix MSCI World Index Fund returned more than 27 percent in 2023, which subsequently led to investors pouring R60 million into the fund. However, in the following year, the index tracker’s return fell to 16 percent, the report says.
Since financial markets can influence our financial security, our physical security and our emotional well-being, how investors respond to the uncertainty in returns is important and fund managers should play a supporting role to ensure investors stay invested, Zietsman said.
Investors often switch into funds that have been successful because the fund manager has been bold, “rolls a few career-defining sixes” and is idolised as a guru, Zietsman commented. But bold investment decisions can also create volatility and even crash spectacularly causing losses for investors, he said.
Managers should rather influence investors’ behaviour by making active, deliberate and uncorrelated investment risks. These risks should be taken at appropriate scale and without concentrating positions, he said.
Asset managers who focus on avoiding big portfolio blowouts don’t try to make calls on how things will unfold when there is uncertainty. Instead they position their portfolios to do well under most of the possible outcomes, Tim Acker, portfolio manager at Allan Gray, told the Investment Forum.
Acker said last year’s election provided a good example of how Allan Gray managed money to ensure a good outcome regardless of how the election played out.
After the election of the Government of National Unity there was a lot of optimism and shares of companies that are predominantly exposed to the South African economy, the so-called SA Inc shares – retailers, banks, industrial companies and those manufacturing consumer staples - did extremely well.
These SA Inc Shares did 34 percent better than the rand hedge shares – the shares of big multinationals that earn much of their profits from overseas markets, Acker said.
As a result of its attempts to avoid permanent loss of capital, the performance of Allan Gray’s equity portfolio was middle of the road, Acker said. With hindsight Allan Gray should have chosen more SA Inc shares, but there was a lot of anxiety before the election and if it had gone the other way, heavy bets on SA Inc shares would have lost investors’ money, Acker said.
The election was a foreseeable event with an unpredictable outcome, but investment portfolios also have to be able to withstand unforeseen events such as the Covid lockdown and Jacob Zuma’s firing of former finance minister Nhlanhla Nene, he says.
In both these cases, the rand hedge shares outperformed the SA Inc shares significantly, Acker said.
Allan Gray practices what is known as bottom-up investing, so it chooses its shares on the basis of their fundamentals rather than the basis of macro-economic or political issues.
However, it manages the risk of a portfolio by considering these macro-economic issues and their potential implications for the portfolio. Currently, for example, there are many structural challenges that impact SA Inc shares, particularly in logistics and infrastructure, he said. And while South African bonds offer higher yields than cash, they are risky due to mispricing in the local market and South Africa’s rising debt-to-GDP ratio.
Acker says stock picking is still key to earning good returns. The rand hedges are not all good performers - the returns over the past 10 years to January 2025 of the 13 large rand hedge shares show five have produced returns in excess of the SWIX Top 40 index and eight have underperformed this index. Choosing the good ones is a key to outperforming, Acker says.
Reducing risk by avoiding one-way bets in uncertain times allows Allan Gray to take more risk in investments where a good outcome is more certain.
Market headlines often drive short-term market movements, but disciplined investment strategies rooted in research and valuation ultimately lead to superior long-term outcomes. By carefully balancing risk and opportunity, investors can navigate complex financial landscapes with confidence, he said.
Over-confident investors, however, try to time the market by switching out of carefully managed funds and into much riskier ones that are likely to be past their peak. These poorly timed decisions typically come with a behaviour tax.
