Mothepu Mothae (MM)
Position: Head: Fund Manager Research
How has the multi-management space changed or developed since the beginning of the COVID-19 pandemic?
MM: One of the biggest changes we have seen is the level of our management engagements. As a result of both government and company led measures to combat the spread of the coronavirus (Covid-19) pandemic, as a business, we have had to turn to virtual engagements with managers. While this has brought the benefit of efficiency, we believe that it is always more insightful and meaningful to have face to face engagements with managers as it informs what we term, the ‘gut feel factor’, which is a big part of our qualitative research process in manager selection. In the same breath, we have seen an increase in the volumes of and access to information that our managers consume which has forced us to be more mindful of how we engage with them on the myriad of virtual channels that have become available since the beginning of the pandemic. Ultimately, our objective is to ensure that we have the right kind of information, for example, up to date economic views, outlook in terms of the markets, and most importantly managers’ performance, including how and why they have performed in the manner that they have.
What have been some of the most challenging elements during this period for fund manager research?
MM: One of the main challenges we have faced has been staying focused on our key objectives amid the chaos and the volatility of the past few months. We set very clear and long term investment objectives for our portfolios, and the expected performance. However, when the market drops more than 20% as seen in the first quarter of this year, and then subsequently rallies more than 20% in quarter two, it is quite a daunting task to remain focused on these objectives. This is because these short term spikes and drops as well as volatility impacts performance quite aggressively in a short time span and ensuring our sanity, including that of our clients, while reassuring them to stay focused on the long term becomes challenging, especially in this environment. For example, we see clients switching out of growth assets into risk free assets like money market and cash. Now, when clients disinvest at lows, they crystallize these losses. However, we believe that it is during this volatility in fact that one should be allocating more capital. It has also been a tough performance environment for the last while for managers, and resultantly tough for us to select managers, and sticking to managers that have underperformed for a long duration of time. However, we have witnessed during this same period how some managers have been rewarded for how they have been able to manage risk and volatility. So it is during these moments when managing selection can be quite challenging in a similarly challenging environment, especially because most managers have really underperformed.
How do multi-managers add value in an investor's world?
MM: Ultimately as multi managers we are tasked with building efficient and outcomes-based portfolios for our clients. As such, the most important value-add from a multi-manager perspective is risk management. As we have seen over the years, the investable universe has grown substantially. As a multi-manager, we are positioned to make sense of this large universe, that is, filter the best managers from the rest. Importantly from a risk management perspective, our specialization is in blending and combining these different investment strategies in both a controlled and weighted manner, simply put, portfolio construction. We therefore add value allocating and controlling the exposures to these risky investment strategies, and ultimately build an outcome-based portfolio for a client that has a high probability of reaching that that outcome.
Secondly, the benefit of a multi-manager is efficient cost management. We have helped clients to benefit from a cost perspective in that we pull in client assets and as such, we are able to negotiate lower fees with the managers, and therefore lower costs which ultimately come through in the investment performance that clients experience when they reach their investment objective.
Finally, diversification. As multi-managers, we are effective at hunting for various investment strategies and investment capabilities in this large investment universe. Some of these strategies are not directly accessible to clients but to institutions only. Our ability to access these strategies in a multi-managed portfolio provides clients with the diversification they require, including best of breed type managers that ultimately allow for better client outcomes.
During periods of uncertainty, or extreme volatility how do multi-managers conduct their research?
MM: The way in which a multi-manager conducts research is not going to change, especially during these periods of volatility or uncertainty. In fact, it is during these periods that the manager research process becomes quite important. So while the process in itself remains consistent, it is the execution of the process, which entails getting closer to managers, understanding how they have performed in this environment and revisiting the appointment of managers that is key. For instance, by revisiting why we appointed certain managers we gain insight into whether they are performing in line with expectations and the mandate we have given them. So, while a manager can underperform, the question we ask ourselves is, is this style-driven underperformance? That is, the manager’s style or philosophy is not in favour in the current market or environment, but the manager continues to perform in line with why they were appointed.
Crucially important is understanding manager sensitivity to this particular environment. As multi-managers, we explore how this environment can impact our weightings and exposures to these managers because for managers that are negatively impacted by this volatile period, we would in theory, down weight them. However, for managers that behave well in this particular environment and manage volatility well, we would allocate a little bit more capital because they are able to insulate and journey the portfolio more efficiently given the volatility and uncertainty playing its way in the markets.
How do you see the world of multi-management developing over the remainder of 2020?
MM: For the better part of the remainder of this year, we see some of the themes that we spoke about as early as 2018, starting to play out in this current environment. For example, we anticipate increased manager merger and acquisition (M&A) activity. Our long held view has been that there are more managers in South Africa than the actual market. The majority are startups that were conceived out of the post Global Financial Crisis (GFC) and have assets under management (AUM) of between R5billion - R10 billion. The reality however, is that in this economic environment, it has become extremely tough for a lot of these startups to survive and therefor the emergence of M&A activity. The upside for us multi-managers is that we are in a better position to research and assess the managers effectively as the universe narrows somewhat. From a passive environment perspective, we have witnessed an increase in product proliferation and innovation which equates to new strategies. So while the number of managers is high, the number of opportunities and strategies available for us to build better portfolios is also high.
Another factor that we see impacting the multi-management space is related to costs. We believe that access to efficient strategies will result in more competitive costs. We are already seeing a fair number of managers reducing their pricing and fee scales. In terms of how much managers do research, we think that this is a quite an innovative environment for us to sharpen our tools in terms of how we build efficient objectives/ outcomes-based portfolios for our clients. Finally, an important factor that will play out in our space is how as multi-managers we conduct our operational due diligence, in an environment where operational sustainability is growing in importance. The Covid-19 pandemic has been a catalyst in further entrenching environmental, social and corporate governance investing (ESG) not only as an investment theme, but as an important component in a manager’s investment process. Therefore managers who incorporate ESG as part of their process will undoubtedly help and give insights into how entities conduct their business.