Monday, August 24, 2009

PERSONAL FINANCE (Independent Newspapers), National 22 Aug 2009, By Bruce Cameron

I originally set out to write this column to mark National Women's Day two weeks ago. One reason I wrote this column was my intense irritation at a gold coin company that issued a media release saying it was minting another edition of its "Princess Di" coins to mark Women's Day. This was cheap exploitation of what should be a serious event, and was made worse by the fact that the coins are not a real investment. These "personality" coins are totally over-priced relative to their gold content. The other reason I wrote this column was to tell you about two impressive women whose paths I cross regularly because of my fascination with blends, both wine and investment. Many of the investments I have made have been blends and many of my favourite wines are blends. I simply do not have the depth of knowledge or the time to make decisions on how to blend assets correctly, let alone try to pick each security in each asset class. I am not prepared to take such risks with the bulk of my savings. Neither do I try to blend my own wines. Instead, I have tended to use balanced, or what the unit trust industry calls flexible, funds for most of my investments. I have relied on patience and saving over the long term to provide me with the results I want. This approach has served me well. I am not trying to argue that all blends, whether wine or investment, are good; some blends are excellent, some are drinkable and others cannot be used even as vinegar. One thing I have learned is that a good blend does not happen by chance or by trying to piggyback on the success of others. You have to know what you are doing. This brings me to Women's Day Two of the more remarkable blenders I have met are Anne Cabot-Alletzhauser, the chief investment officer of multi-manager Advantage (part of the FirstRand Group), and Norma Radcliffe of Warwick Wine Estate (on the R44 to SteUenbosch, off the Nl before Paarl). Both, in their way, are zealous about getting their blends right. Life with Camcron Bruce Cameron Anne has been at it for 29 years. Norma celebrated 25 years of winemaking this year. They entered their professions when these were male-dominated. To a lesser extent, this is still the case today. A while ago, I attended a briefing by Anne on her approach to multi-management. I was amazed at the extent to which she tests the ability of asset managers to add real value. Multi-management is simply another way of creating a balanced, or flexible, portfolio. But instead of a single asset management company blending the asset classes and selecting the underlying investments, the multi-manager decides on the asset mix required to achieve different results. The multi-manager then selects asset managers from different asset management companies to decide on the underlying investments. This approach is also known as best-of-breedr DIFFERENT TARGETS Another important element of blends is that they do not provide a one-size-fits-all solution. Good wine blenders have something in mind when they blend their wines. For example, Norma will tell you that her Trilogy blend goes best with veal, game and intensely flavoured stews, as well as bitter chocolate desserts. Likewise, most investment blends exist to achieve different targets, which may include reducing volatility risk (the propensity for an investment to swing widely in value) or earning a certain return - for example, three or four percent above inflation. Every time I have spoken to Anne or attended her briefings, I have learned something new - or rather, a lot new. I have also been to a number of wine tastings at Warwick, and was fortunate to be invited to a tasting to celebrate Norma's 25 years in the industry. Much of the focus at the tasting was Norma's taking us through her blends of the past quarter-century, starting with the 1984 Femme Bleu, through to the more well known Three Cape Ladies and the flagship Trilogy. Her son, Mike, recently bottled a special blend, First Lady, to recognise the contribution made by his mother. Norma can be compared to a single asset manager, as the grapes used for the various blends come from the Warwick vineyards. YEARS OF TESTING Apart from marking Women's Day (albeit a bit late) by mentioning these two remarkable people, there is a point I wish to make: getting it right consistently does not happen by chance. It means years of testing, both you and your product, ensuring that the basic ingredients are of the best quality and that the mix provides the right balance for what you want to achieve. It is for this reason that I am contemptuous of many so-called multi-managers, in particular most of the unit trust funds of funds (FoFs). The people who manage these funds simply do not have the time, dedication or expertise to manage them properly. Allow me to diverge. My brother-in-law owns the Occidental Bar at the Kimberley mine museum. Recently, someone attempted to sell him something called Pearly Bay. It was so dreadful that he added vinegar to some of it and gave the result to one or two of his customers as an experiment. They found the vinegar blend the better option. I tasted Pearly Bay without the vinegar and I can say it is quite the worst wine I have ever tasted. As you can have a Trilogy or a Pearly Bay, so you can have an Advantage portfolio or one of those dreadful bottom-of-every-thing, broker white-label fund of funds, where a financial adviser, in most cases without the necessary time or expertise, is doing the blending. i VINTAGE VERSUS PLONK Let me give you an example. Without first looking at the performance tables, I decided to select a unit trust sub-category that was important for long-term savings (namely, retirement), where the investment portfolios are a blend of asset classes and where investors are protected to some extent from high-risk bets by the prudential investment requirements of the Pension Funds Act. I chose the domestic asset allocation prudential medium equity funds over three years to the end of June 30, 2009. I found both vintage performance and vinegar. The best performer was the Prescient SA Balanced Quant-Plus Fund, with an average annual return of 11 percent - not bad in the current market. The vinegar was supplied by the Quantum Balanced FoF, with an average annual return of minus 1.32 percent. Incidentally, in second place, and the best-performing fund of funds, was the Umbono Core Managed FoF, with an average annual return of 9.51 percent. (Not bad under current market conditions.) This fund, which is in the Old Mutual stable, uses tracker, or passive, portfolios as its building blocks. So, in simple terms, the different asset classes provide the average performance of the market. The skill lies in blending the asset classes. I then took a closer look at the Quantum Balanced FoF. When I looked at the fund's fact sheet, I found that 36 percent of the fund is in two other funds Quantum manages: Quantum Core Income and Quantum Global Managed. And blow me down, I found that both these funds are also multi- managed funds. And the Global Fund is managed by RMB Asset Management, three of whose funds make up more than 20 percent of the portfolio. On its website", Quantum Investment Partners refers to itself as "master blenders". I would suggest they take a few lessons from a real investment master blender - Anne - or else the people who are placing their money in Quantum's hands will be resorting to Norma's blends. Finally, a note of warning: be very careful when an adviser suggests that you place your money in a white-label fund that operates under the licence of another unit trust management company, in particular if it is a fund of funds. (Quantum is not one of these and does have qualified people making its investment decisions.) Many white-label funds charge excessive fees and are operated by financial advisers who do not have the necessary expertise or time to do so properly.

* Cameron is the author of Retire Right (Zebra Press), which is now in its second edition.
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