Issue: September/October 2007
Old Mutual Corporate

The long term value of active asset management

Investors may be tempted at this time to reflect on the past performance of their fund and ask themselves "what value has my asset manager added?"

A five year trending bull market has certainly provided most investors and asset managers - in fact anybody involved in the stock markets - with spectacular returns almost irrespective of where one chose to invest. Good times for all!

Ironically, it is more difficult for active asset management to prove their worth in such sublime conditions because - as the old saying goes - "a rising tide floats all boats". The likelihood is that individuals investing directly in the market themselves would have managed very well, without the help of professional asset managers.

However, one need only look at the performance of equity-only mandates that RMB Asset Management have been given to see that over time, and even in trending bull markets, active asset managers are able to add significant value.

The outperformance of an equity-only mandate over the All Share index is a barometer for the investment skill of the manager.

The graph above shows the performance of a RMB Asset Management equity mandate (blue) against the All Share Index (red). While there is symmetry between the lines, one can clearly see that the RMB mandate managed to avoid the market blow out in May 2002 which bottomed in March 2003. Since outperforming the market, the fund has maintained and grown the advantage over the long trending bull market that has brought glee to so many investors.

It is impossible to predict the vagrancies of the market. Investors that buy the market (ALL Share index) must live with the reality that they are at the mercy of the market. As active managers, RMB Asset Management believes that through fundamental analysis of the listed companies we invest in, combined with a macro economic assessment of the market environment, we are able to select quality companies that are not as adversely affected by down markets as other companies might be, and are able to rebound faster in bull markets.

In terms of our valuation methodology we believe that:

  • assets can be valued by using fundamental analysis and widely accepted valuation techniques;
  • asset prices fluctuate around this established value, creating anomalies that can be exploited. Anomalies arise from investors putting greater weight on shorter-term considerations at the expense of the longer terms; and
  • these pricing anomalies are predictable based on the concept of the investment cycle.

At RMB Asset Management we believe our style neutrality and superior stock-picking capabilities give us a distinct advantage over our competitors, as we are able to deliver superior returns over all market cycles.

Here again the numbers speak for themselves. The table below shows that the RMB managed mandate has less volatility (measured by standard deviation) than the overall market.

Ultimately, uncovering value is the definitive test of the active asset manager.

Asset managers charge their clients fees for administering and managing their money on the basis that as professionals in the asset management industry we can add value to the investment process.

The timeframe that an investor has in mind is also critical. Fundamental analysis of companies is not a short-term strategy. The asset manager needs to make decisions on whether the current and future actions of management will have positive or negative consequences for companies relative to their competition and relative to other sectors of the economy.

Successful asset managers will add value consistently and meaningfully over a long period of time that will significantly outweigh the fees paid for the asset management service by the client and the costs of the active management to the portfolio.

What is of importance here is that clients should only pay fees for actual 'value add' (beating the benchmark) by the manager and not for the obligatory performance that the market delivered. This is often referred to as Alpha (value add) and Beta (market performance).

Delivery of superior market performance at less volatility (risk) than the general market is surely worth the cost for the value that active management is able to add.