South African investors have a love-hate relationship with listed property, with significant shifts in sentiment and demand evident over the last 10 years. Before 2017, it was quite common for multi-asset funds to have healthy allocations to the S.A. listed opportunity set mostly due to the appeal of property companies offering relatively stable dividends. The S.A. property market demonstrated strong performance between 2013 and 2017, attracting significant investment flows into the sector, as depicted in the chart below. Source: Morningstar
0 Comments
Why fees are not the only determinant to financial success Managing funds and investments requires time, money and expertise. As with any service provider, you are expected to pay a reasonable fee for the use of a company’s products and/or services. The same rule applies in the world of investments and fund management. Warren Buffet’s wise words “Price is what you pay, value is what you get” speak to the actual price that you pay for an asset, stock or investment, versus the intrinsic worth and added value of that investment. The same train of thought can be applied when it comes to the fees paid for investing. Fees are most certainly an important aspect to consider, however, it’s not the only factor that should be considered, but rather be seen as one piece of a larger puzzle. Source: Morningstar
In the fourth episode of Morningstar South Africa’s Adviser 2.0 webinar series, we tackled the topic of succession planning. After spending decades building a financial advisory practice, it’s often difficult to think about handing it over to new owners. But planning for a day when you are no longer an integral part of a business that you built, nurtured, and grew can prepare your practice for a successful future after you have stepped away from the helm. Making succession planning a priority Whether an adviser steps away from their advice practice due to retirement, ill health, by choice, changing career paths, or as we’ve seen in Australia, due to regulatory changes, it is of paramount importance to have a succession plan in place from day one. Source: Morningstar
Storytelling is a powerful way of engaging with people and connecting ideas. One of the most captivating stories in financial markets today is based on the transformative potential of artificial intelligence (AI) and the companies that are best positioned to benefit from the technology. The real challenge for investors, given the current levels of market exuberance, is separating fact from fiction in that story and establishing what a fair price is to pay for uncertainty. Source: Morningstar
The FIA Intermediary Experience Awards is the most prestigious and well-known annual recognition event in the South Africa financial services industry for more than 20 years. The Awards recognises product providers (insurers) for the products, solutions and services they offer to the end-consumer through our member intermediaries or financial advisers.
This year's winners are: Sanlam won long-term insurer of the year (risk). The non-life insurance awards were split by sector. Santam won for personal lines; Western National for commercial; and Hollard for corporate. Allan Gray won two awards for investment products: lump sum and savings. Discovery Health won for healthcare Momentum Corporate for employee benefits. We congratulate these product providers for winning this prestigious award. We as Daberistic have had long-term relationship with these product providers, and we will continue to offer the best insurance and investment solutions to our clients. We just published an update of our annual “Mind the Gap” study. The study estimates the return of the average dollar invested in funds and exchange-traded funds (that is, “Investor Return”) and compares it with the average fund’s total return, with any difference attributable to the timing of investors’ purchases and sales. The smaller the gap, the more investors captured their funds’ total returns and vice versa. In this year’s study, we found the average dollar invested in funds earned a 6% annual return over the 10 years ended Dec. 31, 2022, while the average fund gained about 7.7% per year over that same span, for a gap of about 1.7% annually. What this means is that investors missed out on about one fifth of their fund investments’ average net returns, a significant shortfall. That gap is more or less in line with what we’ve found when estimating the dollar-weighted return gap for the 10-year periods ended December 2021 (-1.7% gap), 2020 (-1.7%), 2019 (-1.5%), and 2018 (-1.6%), suggesting that timing costs are a persistent drag on the returns investors earn. Gaps by Asset Class The gap varied when we grouped funds by certain dimensions like asset class. For example, as shown in the first chart, the average dollar invested in allocation funds gained 6% per year versus a 6.4% return for the average fund, the narrowest gap of any asset class. On the flip side, investors in narrower sector equity funds earned only 6.4% per year on their average dollar, which was 4.4% less per year than the average fund’s return, a large deficit reflecting mistimed flows. Encouragingly, the average dollar invested in U.S. stock funds earned 11% per year over the decade ended December 2022. That was only 0.8% less than the average fund’s return, which was narrower than the gap we estimated over the 10-year periods ended 2019 through 2021, as shown in the chart below. While it would be preferable to see U.S. stock fund investors capture even more of their average fund’s return, it appears that mistimed purchases and sales were less costly as a share of returns than in other asset classes. That was quite apparent with alternative funds, where the average dollar lost almost 1% per year while the average fund rose about 1% per year. To be sure, the average alternative fund’s return was nothing to write home about, but it is still concerning that investors in these funds ended up frittering away even those modest gains and then some. Gaps by Category We also estimated the dollar-weighted returns of the 10 largest Morningstar Categories by net assets, as shown in the chart below. The average dollar invested in the most popular U.S. stock categories earned almost as much as the average fund, as evidenced by the relatively small gaps for large-blend, large-growth, and mid-blend. Similarly, the average dollar-weighted return of moderate-allocation funds nearly matched the average fund’s total return. Investors struggled to a greater degree in timing their investments in foreign-stock funds, with larger gaps seen between the dollar-weighted and time-weighted returns of foreign large-blend and diversified emerging-markets funds. Indeed, the average dollar invested in emerging-markets funds earned nothing over the 10 years ended Dec. 31, 2022, a disappointing outcome. Investors also earned meager dollar-weighted returns in bond funds. In fact, the average dollar invested in intermediate core bond funds lost about 0.2% per year over that span. Gaps by Volatility One of the clearer takeaways from our Mind the Gap study is that investors are more likely to mistime their investments in highly volatile funds than they are in less-volatile funds. That relationship held over the 10 years ended Dec. 31, 2022, as shown in the table below, which groups funds by category group and standard-deviation quintile (the first quintile containing the least-volatile funds). The least-volatile quintile had a smaller gap than the most-volatile quintile in six of the eight category groups. On average, the least volatile funds’ dollar-weighted returns lagged their total returns by around 0.9% per year, which was a full percentage point narrower than the gap for the most-volatile funds.
Takeaways and Lessons While investors have made strides in many ways, our research finds that there’s still room for improvement when it comes to timing their investments. What can investors do to earn more of their fund investments’ total returns? Here are a few lessons to be drawn from our findings: Less Is More Time and again, we have found that investors in allocation funds capture a greater share of the funds’ total returns. Why? They are designed to be all-in-one holdings given they span multiple asset classes and rebalance on a regular basis, sparing investors from having to do much maintenance. Allocation funds also help mitigate the risk of mental-accounting mistakes that investors are prone to, such as buying more of a high-performing stand-alone strategy and selling a lagging one when they should be doing the opposite. Allocation funds combine these separate strategies to form a cohesive whole, and thus the performance divergences that otherwise might push investors’ buttons are largely unseen. More (Focus and Volatility) Is Less Another clear finding from the study is that investors have struggled to successfully use narrowly focused or highly volatile funds. These types of funds—whether they were nontraditional equity offerings or those that were among the most volatile in their category group—saw some of the heftiest return gaps that we measured. Most investors would likely be better off keeping it simple in ways that emphasize wide diversification and low costs, which means steering clear of strategies like these. Good Beats Perfect The evidence suggests investors enjoyed greater success by favoring simpler solutions like allocation funds. Interestingly, we found larger gaps in areas and styles for which there is robust academic support, like tilting to value, smaller-company stocks, or emerging markets, suggesting that the added volatility these strategies entail cost investors any excess return they might have earned and then some. The same held for more-exotic strategies that on paper might push a portfolio closer to the efficient frontier but in real life confound investors into costly mistakes. Source: Morningstar Forward Estimates
Making accurate forecasts is easy when the trendline has been established. (Making inaccurate forecasts is always easy.) By the mid-90s, it was clear that indexing would boom. And even before I formally bid mutual funds adieu in a 2021 article, exchange-traded funds had already secured their future. ETFs do not yet control more assets than traditional mutual funds—but they certainly will. On other occasions, the task is perilous. Early outlooks for the internet’s prospects consisted, in essence, of monkeys tossing darts. For example, the consensus view entering the new millennium was that the best prospects for recording internet-related profits lay with business-to-business applications. Wrong! Today, four internet-related firms are among the nation’s 10 largest companies: Microsoft, Amazon.com, Alphabet, and Meta Platforms. The first derives half its revenue from businesses, and the latter three hardly any at all. Considering AI Predicting how artificial intelligence will affect the investment industry falls between those two extremes. The internet was so difficult to foresee because it broke radical new ground. Cellphone conversations resembled those from landlines, but the internet experience was unlike anything that came before. Predictions were made from a foundation of sand. In contrast, AI has at least something of a predecessor, with computers. Before AI was developed, microprocessors were the great investment innovation, providing 1) portfolio managers with more information, 2) financial advisors with software, and 3) researchers with improved analytics. The new technology permitted the previously impossible. (For example, Morningstar owes its existence to the availability of personal computers and desktop publishing.) Using the computer revolution as a backdrop, let’s consider how artificial intelligence might affect each of those three investment-industry segments. Portfolio Managers Artificial intelligence is unlikely to change professional money management. Here, the computer analogy fully holds. When super computers arrived in the 1980s, several “quantitative” investment firms boomed. They profited by mining knowledge from huge databases that had not yet been exploited. Their victory was brief. Within a few years, their funds had reverted to the mean. You know why. Any reasonably sized money management business could buy its own computers and investment databases, thereby emulating the quants. And that is exactly what happened. The competitive advantage quickly became mimicking the Joneses. Technologically assisted discoveries no longer mattered because the marketplace had fully incorporated them into equity prices. The same process will occur with artificial intelligence. Any portfolio management boons from employing AI will soon be erased by imitation. The status quo will therefore persist. Most actively managed funds will trail their benchmarks because of their costs, and identifying the happy exceptions will remain a difficult task. Prediction: Given the dominance of indexing, active portfolio managers have little to lose. The good news for them is that artificial intelligence will not hurt them. Unfortunately, neither will it help them. Financial Advisors Here, the computer analogy partially fails. It works in that both computers and artificial intelligence can process data and arrive at conclusions far more rapidly than humans. However, it is incomplete because, unlike AI, computers do solely what they are told. Assigning responsibility for their output is straightforward. A computer is no more to blame for providing flawed advice than is a hammer for striking a nail. The fault lies with those who gave the instructions. One cannot similarly trace artificial intelligence’s steps. That presents a major obstacle when adapting AI for financial advice. On the one hand, AI is well positioned to create customized recommendations, given its flexibility. On the other hand, AI operates outside of human control. Perhaps AI presentations will become so adept at explaining their “reasoning” (to use the term loosely) that customers will grow accustomed to accepting its counsel, without hesitation. Perhaps. However, at least for the foreseeable future, I suspect that AI will supplement current financial-advisory practices rather than supplant them. Conventional software will suffice for most financial-advisory clients. For those with special conditions, AI will serve as a research assistant, offering potential but discretionary suggestions. Prediction: Unlike active portfolio managers, financial advisors were unharmed by the index-fund revolution. Like active portfolio managers, they face little threat from artificial intelligence—and possibly great benefit, if they harness its powers. Investment Researchers The prognosis is most challenging within my own field of investment research. Financial advisors earn their keep from their recommendations. We researchers, on the other hand, are paid to attract attention. That makes artificial intelligence a true rival. Those who care about investing have only so many hours to devote to the subject. They can spend them on work published by either people or AI. My hope, naturally, is that artificial intelligence never becomes sufficiently convincing. It provides valuable basic information and fact-checking, as with Google searches, but its insights are judged to be shallow. The material published by artificial intelligence has already surfaced elsewhere, by an author who truly understands the subject, rather than simulating that knowledge. Whether my hope will be realized remains to be seen. Outdoing computer programs is simple. Even the cleverest programmers struggle to devise output that does not sound witlessly mechanical. Artificial intelligence is quite another matter. AI articles are skillfully written. The content is less sophisticated, but it will surely improve with time. Prediction: There will always be a place for original research, which AI cannot produce. However, most published investment research is not truly new but is instead commentary that popularizes existing ideas. Very soon, such work will face stern competition from artificial intelligence. The views expressed here are the author’s. Source: Morningstar |
AuthorKevin Yeh Archives
January 2025
Categories
All
|