Would you want to pay for below market returns?

Ternary Financial Services CC offers a full suite of services to individuals and corporate clients. Our clients and the industry do however know Ternary as investment advisors, and as such we feel the need to weigh in on the active versus passive debate.

We are firmly in the corner of the active manager – but this statement needs to be qualified. The argument is frequently made that the “average” active equity manager is not able to beat the index. We do not dispute this fact – the numbers do not lie. We do however dispute why it should be assumed that we would invest with an “average” manager.

The first filter that one can use to discern superior active managers is their track record. This is information is public and readily accessible. It is however a fool’s game to blankly look at performance and extrapolate future returns. The reason behind the returns is far greater than the performance itself. When investigating returns it is important to discern between those managers who invested correctly due to an ingrained and consistent philosophy and those who were merely in the right place at the right time.

This requires an in depth qualitative look at the investment teams behind the funds and looking at whether they truly put their money according to their (usually very well crafted) investment philosophies. A long term track record allows you to delve into holdings during differing market periods and valuations.

Another often overlooked aspect is the actual person behind the management of a fund. For what period of the fund’s history is the current manager actually responsible? How strong is the team that supports a manager and would they be able to implement the same investment style that you bought into?

The above is no small feat and a lot of effort needs to be exerted to ensure that your research is complete and remains relevant. This is why the passive managers often say that it is easy to look back and see who the managers were that outperformed but far more difficult to determine who the outperformers of the future will be. They are absolutely correct, which is exactly why investors have looked to Ternary Financial Services CC in the past and present to help guide them on their investment path.

The issue of fees needs to be addressed and to our minds it is simple. As long you can extract greater after fee returns from an asset manager, over appropriate periods of time, than the market can deliver then whatever fee they are charging is academic. Yes, it is important to understand the fee structures of the various funds to enable you to make prudent decisions regarding which managers will find it difficult to outperform purely based on the level of fees that they charge. Excessive fees should not be tolerated, but as with any other product cheaper is not necessarily better.

Vanilla index trackers offer low fees… LOW fees, but fees nonetheless. This means that you are paying for the certainty of underperforming the market by at least a margin equalling the fee charged.

Above we have only talked to pure discretionary investments which are able to invest fully in equities. This is not the level of volatility that most investors are willing to accept. Volatility is managed via diversification across not only different holdings in a single asset class but by being able to allocate money across asset classes to ensure that you are able to take advantage of asset class mispricing. Some of the latest exchange traded funds, while being labelled “Balanced” merely hold a static exposure to a variety of asset classes. This means you will hold X bonds when bonds offer value but you will hold that same exposure to bonds when bonds are blatantly expensive.

This is brainless investing and while it will get you some way toward your investment goals it is not difficult to fathom that the application of an experienced asset manager’s intellect is more likely to get you closer to your goals.

We have not even touched on the fact that a vast portion of investors capital lies in retirement products e.g. pension funds, provident funds and retirement annuities. These products are governed by Regulation 28 of the Pension Funds Act which limits the exposure to certain asset classes, thus requiring investors to allocate across asset classes.

While active management requires research and constant contact with the markets and asset managers, we believe that it offers the most value to our clients. Passive investments will give you what the market has to offer but active investment can give you the market… and more.

Please feel free to contact us at info@ternary.co.za if you would like to discuss investment with proven well researched active asset managers.