In the opinion of many Discretionary Fund Managers (DFMs), investment performance is the most important thing that a DFM needs to deliver.
Performance matters. It’s crucial. Performance is what the client expects and pays for – nothing else, Leigh Kohler, head of DFM at INN8 Invest, believes.
A DFM proves its value to clients when the DFM consistently meets the objectives of the client on a net-of-fees basis, he adds.
A DFM is an asset manager and must be able to evidence a process and track record like any other investment manager, Brandon Zietsman, global CEO at PortfolioMetrix, says.
It would be inconsistent for DFMs to highlight the rigour of their own manager selection processes but be unable to present a performance track record that would survive the same scrutiny, he adds. Clients pay the DFM fee and can reasonably expect their advisors to have properly kicked the tyres of the DFM, he says.
Palesa Dube, independent financial planner, founder of Centillion Wealth and recent winner of the Financial Planner of the Year, agrees. She says above all else, her clients want to see their investment portfolios grow.
Other factors wrongly prioritised
Zietsman believes it is concerning that the peripheral services that DFMs are offering advisors – regardless of how important these may be – are resulting in performance being swept aside as a deciding factor when advisors choose a DFM partner.
He cites a recent survey by NMG Consulting, where advisors ranked the factors they considered when choosing a DFM and performance was ranked 9 out of 15 factors. Zietsman believes that DFMs should not get off so lightly.
He continues that before advisors outsourced investment decisions to DFMs, they made investment choices by comparing the funds of leading managers and they were absolutely interested in the pedigree of the performance and the track record, so why should they not be interested in how a DFM’s portfolios perform?
Zietsman points out that a one percentage point difference over 30 years can result in a 30% difference in the savings outcome and therefore a fundamentally different retirement prospect.
Being insensitive to the performance bona fides of the DFM is hazardous and even risky from a regulatory perspective, he contends.
Lack of transparency on performance
The lack of transparency about the performance of DFM portfolios is a problem that makes it difficult for advisors to compare the outcomes achieved by one DFM with another, or by a DFM and a multi-manager or single manager.
Performance should be rated net-of-fees (investment fees) and DFMs should provide fact sheets that enable comparisons of performance, in Kohler’s opinion. He adds that unfortunately this is not the current reality as very few DFMs have fact sheets available on their websites. He believes the industry needs to create standards and more transparency.
There are some providers who have started providing performance comparisons via awards and creating comparison platforms and this provides probably the best way to understand performance on a comparative basis, in Kohler’s opinion. He believes that there is a lot more to do and DFMs who benefited from asset growth from a first-mover advantage, are keeping their cards closest to their chests when it comes to performance.
Ian Beere, chairman of Netto Invest, says it is important to consider risk-adjusted returns – the diversification and the level of downside risk of a portfolio needs to be evaluated together with performance.
Opaque performance risk
Zietsman argues that if as an advisor you cannot establish transparent and comparable performance data, then you are in a risky position with your client and you cannot claim you have discharged your fiduciary duty.
Either you need to be able to check the DFM’s performance track record – because many of them manage transparent and comparable unit trust funds – or the DFM needs to provide some other track record that is verified by a third party. Advisors should beware of “paper portfolios” – back-tested portfolios – and performance track records cherry-picked from a number of similar mandates managed for different advisors, he warns.
Zietsman argues further that it is not difficult for DFMs to publish performance data that complies with the global investment performance standards (GIPS); and while DFMs are differentiated by being service providers, they will always be active managers and must like any asset manager be able to produce a track record that complies with the global standards or they should not be charging for what could be inferior outcomes. Where portfolios managed by the DFM an advisor has chosen perform particularly badly, the advisor needs to be able to show that they had checked the performance data prior to appointment. Performance and not peripheral services such as assistance with compliance or the quality of their fact sheets that make advisors’ lives easier is the acid test, according to Zietsman.
Comparing performance
Dube says in selecting a DFM, Centillion assessed how the DFM reports its performance to ensure that the process was accurate and client-friendly.
Over and above this, Dube says she uses a complementary system that enables Centillion to compare the reported performance independently.
Craig Gradidge, independent financial advisor and co-founder of Gradidge-Mahura Investments, says performance is easier to measure when a portfolio is managed as a unit trust rather than a model portfolio. Unit trust performance is transparent as funds’ returns are reported by third-party data providers and funds are ranked in categories with similar investment universes.
Conclusion
While it is clear from the opinions cited above that investment performance is undoubtedly a key measure of the value and success of using a particular DFM, it is important nevertheless that clients are achieving all their goals. An argument could be made that the issue is less about whether DFM performance is being compared against other DFMs, and more about whether advisors are happy that clients are meeting their goals and/or the model portfolios are achieving what they set out to do.
