Investing is a world where every investment manager claims to be terrific and where they can typically back it up with some or other performance analytics. However, most investment managers actually underperform the market, making active management a losers’ game unless you have the skill to select superior investment managers and furthermore blend them in an optimal manner to provide superior risk-adjusted returns.
Our unique investment manager research and selection advisory offering centres around a deep understanding of the investment manager industry, which we have gained over the past two decades. We have gained our competitive edge not only from our wealth of investment consulting experience where we advised to most of the largest institutional investors in South Africa but also from our offshore multi-manager investment management backgrounds. Clients require advice that is based not on a theoretical and academic basis but on proven investment management principles. Investment advisors that have institutional investment management backgrounds such as us have the advantage to meet more sophisticated client demands.
“When prospective new investment managers made presentations to the Fund, it was often proved that GraySwan had more knowledge of their history than the presenters. I honestly believe that GraySwan has set a new necessary standard for investment consulting in South Africa.”
We look for investment managers that have consistent investment philosophies, distinct and replicable investment processes and an ability to meet your performance objectives within a well-defined risk-managed framework and within pre-defined time horizons. We focus our investments 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 investment managers that will lead to superior performance.
In a nutshell, we focus on the following areas –
- The consistency of the investment philosophy;
- Experience and stability of the team;
- Transparency of the process;
- Incorporation of Responsible Investing principles into the process;
- Accountability and responsibility;
- Performance and consistent risk-adjusted performance;
- Owning the track record;
- Alignment of interest;
- Avoidance of Conflicts of interests.
We will consider recommending the termination of an investment manager when the following are present:
- Major organizational changes including changes in investment style, philosophy, process, and strategy;
- Key staff losses;
- Deterioration in the financial strength and reputation of the company;
- Deterioration in operational capabilities and administration;
- Deterioration in compliance management;
- Poor investment performance (medium to long-term);
- Non-compliance to our Responsible Investment criteria.
MANAGER RESEARCH AND SELECTION
Our unique and high conviction investment manager research and selection advisory offering centres around a deep understanding of the investment manager industry. We have gained our competitive edge not only from our wealth of investment consulting experience over the past 15 years but also from our offshore investment management backgrounds where we managed an offshore alternative multi-manager business.
Our proprietary investment manager database encapsulates more than 1000 institutional (segregated and life pooled mandates). We know that we cover the widest range of institutional mandates in the industry as captured by our more than 30 monthly detailed PeerGroup ScoreCards that we conduct.
Further, we also have access to the South African Unit Trust database (ProfileData) of more than 1000 unit trusts and also have access to another offshore database.
We use our Peer Group ScoreCards as well as other quantitative techniques (such as our “Hit Rate Tables and Performance and Risk Reports) to filter the universe of investment managers to a select few which we believe should be assessed from a qualitative perspective.
We believe our unique techniques allow us to identify truly exceptional investment managers for potential inclusion in our clients’ investment strategy. We use “conditional formatting” in all our reports to highlight areas of concern or areas of expertise. Our aim is to find meaning in the numbers. This simply means that we use different colours to “flag” or highlight issues. For example, it is used to evaluate investment managers’ peer relative performance i.e. bottom quartile (“red”), average (“black”) and top quartile (“green”) relative performance. This approach is unique in the investment advisory industry and provides us with a competitive edge. We try to keep things simple but once an issue has been “flagged” we conduct thorough and detailed reports.
Our Peer Group ScoreCards are more than just a Survey – it is a powerful tool in our quantitative investment manager research process. Our unique and detailed evidence-based analytical and reporting approach is used to identify investment managers and mandates/products that we believe will lead to consistent success in the long term. Our ScoreCards are not in the public domain as we construct and tailor-make them to our clients’ needs.
Funds that are eligible for inclusion in the 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;
- the investment manager must have a current or historical relationship with South African investors;
- the mandate size must be at least R100 million; the track record should be at least 12 months.
A large portion of the investable universe can be quantitatively screened out due to historical low success rates of outperforming the markets.
In terms of our qualitative investment manager research process have we introduced an innovative solution called ADOBE Forms which we use to design our range of qualitative investment manager questionnaires. The ADOBE technology provides the investment managers with an electronic template form to complete our questions. The answers can then be exported into matrix form for easy comparisons of the investment managers’ qualitative information.
The following Questionnaires are used throughout our research process –
- Firm Questionnaire;
- BEE Questionnaire;
- Responsible Investment Questionnaire;
- Operations Questionnaire;
- Investment Team Questionnaire;
- Operations Team Questionnaire;
- Product / Mandate Questionnaire.
These Qualitative Questionnaires enable us to sufficiently prepare for meetings and be ready with appropriate questions.
As we require premium service from investment managers regarding the timeous sending of performance data, adhering to the investment mandate, transparent and negotiable fees and any client related service do we believe our Qualitative Questionnaires provides us with insight whether an investment manager can adhere to our high demands.
Further, for our on-site investment manager notes which we take, we use an “App” called Evernote.
In terms of our on-site due diligence, the following minimum criteria are judged:
- Ownership and independence;
- Corporate governance and conflicts of interest;
- Quality and experience of the investment team and staff turnover;
- Investment style;
- Investment philosophy, process, and strategy;
- Financial strength and reputation of the company;
- Assets under management;
- Operational capabilities and administration;
- Compliance management.
One of our large institutional clients noted –
When prospective new investment managers made presentations to the Fund, it was often proved that GraySwan had more knowledge of their history than the presenters. Consistent evaluation of investment managers was done and acted upon even when changes in teams dealing with our mandates were not reported by the relevant investment manager to the Fund. GraySwan ensured that the Trustees were educated regarding investment terms and products as they created a database where Trustees could log into to broaden their knowledge. I honestly believe that GraySwan has set a new necessary standard for investment consulting in South Africa. This has not only enabled our Fund to take informed decisions regarding investments, but also ensured that we remained in the top quartile since your appointment.
Another large institutional client notes –
Through GraySwan’s high standard of ethics and being independent from all investment managers, the Fund has always had the benefit of receiving unbiased advice regarding its investments and undivided loyalty towards the Fund. Insofar as prospective new investment managers are concerned, this unbiased view has uncovered matters not mentioned by these investment managers during presentations to the Fund, which can then be raised with them. Regarding existing investment managers, regular independent evaluation is very important as they are consistently undergoing changes or need to explain why they acted in a certain manner regarding an investment.
We’ve already empowered our clients to successfully invest in Responsible Investment products and their top performing track records are proof that responsible and sustainable investing is part of a winning strategy.
Our continuous challenge and focus are to ensure that we as well as our clients truly understand what it means to be a responsible investor. Our duty extends to beyond just providing a superior risk-adjusted return on our client’s capital, as it includes ensuring that our client’s assets are invested in ways that support sustainable development towards a world where our client’s beneficiaries can live fulfilling lives in a future prosperous world.
- We incorporate ESG issues into our investment analysis and investment advisory processes.
- We advise our clients to be active owners and incorporate ESG issues into their own policies and practices.
- We seek appropriate disclosure on ESG issues by the investment managers in which our clients invest.
- We promote acceptance and implementation of the Responsible Investment Principles within the investment industry.
- We work together with our clients to enhance their effectiveness in implementing the Principles.
- We empower our clients to report on their activities and progress towards implementing the Principles.
ACTIVE VERSUS PASSIVE MANDATES
We believe that there is a place for both passive and active management in portfolio construction. It’s not about one or the other. Academic research suggests that 85% of investment managers have and will continue to underperform the overall market. The problem is not that investment management is not done well, the problem is it is done well and by many and the active investment management universe thereby becomes the market. The issue is simply that selecting superior active investment managers in certain asset classes is a low probability and low conviction decision.
Our various local Equity ScoreCards (we conduct 5 different local Equity ScoreCards), as well as our offshore Equity ScoreCards, shows that the average local and offshore active equity investment manager has underperformed the respective local and offshore equity markets on an after-fee basis.
Our proprietary optimisation and portfolio construction investment manager research proves that the more active investment managers are selected the larger the role of a passive investment manager in the total portfolio construction. We have conducted a detailed research study, which outlines that as soon as more than 3 active investment managers are selected then a passive mandate becomes relevant.
Outperforming the market after fees on a consistent basis is by no means an easy task but it is possible and has been achieved by a select few premium investment managers. It is therefore crucial for investors to identify the handful of truly exceptional investment managers for potential inclusion in their investment strategy.
RESPONSIBLE INVESTING MANDATES
GraySwan is a signatory to the United Nations Principles of Responsible Investing (UNPRI) and has previously been awarded as the Responsible Investment Consultant of the Year. This award is a testimony to our unique and leading-edge approach of incorporating best practice Responsible Investing principles into our investment advisory and wealth management approach. As a signatory, we uphold the six principles that require us to act with the highest integrity and highest effort on Environmental, Social and Governance (ESG) issues.
Responsible Investing is a balancing act. Investors have to balance positive ambitions for a better world with the practical implications of implementing their long term investment strategy in search of superior returns. There is no question that everybody wants to make the world a better place, but in the same world investors still, require real and competitive returns in order to meet their liabilities and performance objectives.
We firmly believe that there is monetary value in Responsible Investment if you follow a step-by-step approach to incorporate such thinking into your investment process. We believe that by incorporating ESG factors into the analysis of investment managers can result not only in outperformance of the market but also providing superior risk-adjusted performance.
We cover more than 50 Responsible Investment products as per our ongoing research process and have shortlisted specific investment opportunities on which we focus our efforts. Our institutional clients have already successfully invested in various products which we believe are leaders in their field and their top performing track records are proof that responsible and sustainable investing is part of a winning strategy. We are now empowering our private clients to also invest in such products.
We always count. We test, we test and we test again. We don’t trust, we verify and then we conduct extensive investment and operational due diligence and then only do we advise our clients to potentially invest. Our clients are the ambassadors of our proven investment manager selection approach. Herewith two of our largest retirement fund’s testimonies to our approach.
Since their appointment, GraySwan’s investment advice has resulted in a marked improvement in our investment results. We have furthermore been impressed by their work ethic and attention to detail when investigating opportunities or scrutinising investment manager performance. We are particularly pleased by GraySwan’s uncompromising attitude towards staying independent, since it is important to us that our investment consultant does not have conflicting interests that could impact on the absolute objectivity of their advice.
Through GraySwan’s high standard of ethics and being independent vis-a-vis all asset managers, the Fund has always had the benefit of receiving unbiased advice regarding its investments and undivided loyalty towards the Fund. Insofar as prospective new asset managers are concerned, this unbiased view has uncovered matters not mentioned by these managers during presentations to the Fund, which can then be raised with them. Regarding existing asset managers, regular independent evaluation is very important as they are consistently undergoing changes or need to explain why they acted in a certain manner regarding an investment.
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