The changes in Regulation 28 allowing investors to invest up to 25% of its assets with offshore investment managers and an additional 5% in African investments (excluding South Africa) has placed a renewed focus on offshore investment strategy and investment manager selection.
Outperforming the markets after fees consistently is not an easy task but it is possible and has been achieved by a select few investment managers. It is therefore crucial for investors to identify the handful of truly exceptional offshore investment managers for potential inclusion in their offshore investment strategy.
Many investors argue that because the markets are so difficult to outperform it is better to save costs and limit the potential for underperformance by following a passive investment strategy aimed at tracking the performance of the markets.
Although there is more than enough evidence to support a passive investment management approach there is also evidence that truly exceptional investment managers can beat the market which is an argument in favour of an active investment management strategy.
HOW DOES GRAYSWAN DO IT
GraySwan conducts monthly investment manager peer group surveys on a universe of global equity funds. We call these ScoreCards and they encapsulate more than 30 pages of various quantitative ratios to assess any investment manager’s skill. Our offshore ScoreCards range from Global Equity Funds to specialist Emerging Market Funds to Africa ex-South Africa Funds to regional specific funds such as China only Funds.
Funds that are eligible for inclusion in our offshore ScoreCards must meet at least one of the following criteria:
- must be approved by the Financial Services Board (FSB);
- the investment manager must have some presence in South Africa (i.e. a physical presence or a working relationship with a local provider) or are currently managing local client assets;
- have at least a one-year track record and
- $100 million of assets under management.
Academic research suggests that 85% of investment managers have and will continue to underperform the overall market. This is as a result of an active investment manager having to overcome the drag of 2% or more on annual operating costs. The problem is not that investment management is not done well, the problem is it is done well and by many and collectively they become the market.
WE TESTED THE ACADEMIC RESEARCH
We use our peer group investment manager ScoreCards as well as other quantitative techniques to filter the universe of investment managers to a select few which we believe should be assessed from a qualitative and operational due diligence perspective.
After filtering our global database of Global Equity Funds with the above-mentioned criteria we are left with a universe of 44 Global Equity Funds which we analysed via our Global Equity Fund ScoreCard.
The performance (after fees) of each of the Global Equity Funds in this universe was compared against the MSCI World Index (only developed markets) and the MSCI All Country World Index (which includes developed and emerging markets).
The 3-year statistics of the surveyed Global Equity Funds (after fees) indicates the following:
- Of the 44 Global Equity Funds shortlisted, 42 Funds have track records in excess of 3 years.
- 15 of the 42 Global Equity Funds (36% of the Funds) have outperformed the MSCI World Index or MSCI All Country World Index over the past 3 years.
The 5-year statistics of the surveyed Global Equity Funds (after fees) indicates the following:
- Of the 44 Global Equity Funds shortlisted, 41 Funds have track records in excess of 5 years.
- 19 of the 41 Global Equity Funds (46% of the Funds) have outperformed the MSCI World Index or the MSCI All Country World Index over the past 5 years.
The 8-year statistics of the surveyed Global Equity Funds (after fees) indicates the following:
- Of the 44 global equity funds surveyed, 33 Funds have track records of 8 years or longer.
- Only 11 of the 33 Global Equity Funds (33% of the Funds) have outperformed the MSCI World Index or the MSCI All Country World Index over the past 8 years.
Outperforming Global Equity benchmarks after fees consistently is not an easy task but it is possible and has been achieved by some. Whilst academic research suggests that only 15% of actively managed funds outperform the markets, our research suggests that the universe which is available to South African investors, has yielded better results and approximately a third of actively managed Funds can outperform the market.
Therefore, we believe that there is a place for both passive and active offshore investment management in portfolio construction. Opportunities exist everywhere for those who are prepared to look and some investment managers do have the skills to outperform the markets.
We offer our clients a highly experienced and stable team which have over two decades of investment manager research experience. We have gained our competitive edge not only from our wealth of investment consulting experience where we advised most of the largest institutional investors in South Africa but also from our offshore investment management backgrounds.
We believe our unique investment manager research techniques and process allow us to identify truly exceptional investment managers for potential inclusion in our clients’ offshore investment strategy.
We focus our investment manager research and selection process on in-depth qualitative, quantitative and operational research and on-site due diligence in order to guide you to select the optimal blend of passive and active investment managers that will lead to superior risk adjusted performance.
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