Many Happy Returns for Winning Managers

[First published in Personal Finance, January 2014]

How do you win the Raging Bull Award for the South African Management Company of the Year?

Deliver top performance across your range of funds. That is the recipe that has worked for Coronation, which this year took home nine certificates and the main award at the annual event, held on Wednesday evening at the Hilton Hotel in Sandton.

Many of the Raging Bull Awards, including those for the companies of the year, are based on risk-adjusted returns as measured by PlexCrown Fund Ratings.

The PlexCrown ratings take into account both consistency of performance as well as the risk a fund manager takes when investing, with managers scoring higher for good returns at low risk.

Coronation’s PlexCrown report card shows that 15 out of 19 funds rated by PlexCrown Fund Ratings obtained the highest ratings of four or five PlexCrowns each.

Coronation’s star performers among its rand-denominated funds include its:

* Global Managed Feeder Fund (a global multi-asset fund with a high equity exposure);

* Global Capital Plus Fund (a global multi-asset fund with a low equity exposure);

* Industrial Fund (a specialist South African equity fund that invests in industrial shares);

* Jibar Plus Fund (an interest-bearing fund that invests in shorter-term instruments); and

* Strategic Income Fund (a multi-asset fund that invests in interest-bearing instruments and listed property).

All five funds obtained the highest PlexCrown rating (of five PlexCrowns) and were ranked first in their respective sub-categories for risk-adjusted performance over five years to the end of December last year.

The Global Opportunities Equity Feeder Fund (a rand-denominated global equity fund), Balanced Plus Fund (South African multi-asset high equity), and Balanced Defensive Fund (South African multi-asset low equity) also obtained five PlexCrowns and were ranked within the top five in their sub-categories.

Coronation’s Top 20 Fund, its Resources Fund and its Mid and Small Cap Fund were the only three funds that achieved either three or two PlexCrowns, while all the company’s other qualifying funds received four PlexCrowns each.

The PlexCrowns Coronation earned for each of its funds gave it the highest overall average rating of 4.406 PlexCrowns (see “How the top managers are determined”, right).

When the average PlexCrown rating of its funds in various unit trust sectors is compared to that of its peers, Coronation had the:

* Second-highest average rating for the management of fixed interest funds;

* Fourth-highest rating for the management of multi-asset funds;

* Eighth-highest rating for the management of equity and real estate funds; and

* Third-highest rating for the management of worldwide and global funds.

At the end of 2013, PSG was ranked fourth in the management company rankings, but at the end of last year it had climbed to second position.

PSG has 12 funds that qualify for PlexCrown ratings. Its local Equity Fund and its multi-asset Balanced Fund each obtained five PlexCrowns and all but two others obtained four PlexCrowns.

On straight performance, PSG’s Equity Fund is ranked sixth in the local general equity sub-category over five years with an annual average return of 19.05 percent a year, while its Balanced Fund is ranked 14th in the multi-asset sub-category over five years, with an annual average return of 14.69 percent.

PSG’s overall average PlexCrown rating was 3.975.

When its average PlexCrown ratings in four broad unit trust sectors are compared, PSG’s strengths are obvious from its:

* Third-highest rating in the South African Equity and Real Estate category, and

* Sixth-highest rating for the management of South African multi-asset funds; and

* Sixth-highest rating for the management of local interest-bearing funds.

Nedgroup Investments, which was in third place among local management companies, has 17 funds, and five of these achieved the highest score of five PlexCrowns.

Nedgroup’s five top-performing funds on risk-adjusted returns are its:

* Entrepreneur Fund (an equity fund that invests in small-cap shares);

* Financials Fund (an equity fund that invests in financial shares);

* Mining and Resources Fund (an equity fund investing in resources shares);

* Flexible Income Fund (a multi-asset income fund); and

* Stable Fund (a multi-asset low equity fund).

Another five of Nedgroup’s funds achieved the second-highest rating of four PlexCrowns.

The poor performer among its funds is its multi-asset Managed Fund, which earned the lowest rating of one PlexCrown and was one of the worst performers in its sub-category over the past five years, with a return of 8.06 percent a year.

Nedgroup Investments achieved an average rating of 3.878 PlexCrowns. Among its better rankings relative to its peers in the main unit trust sectors was the fifth-highest ranking in the multi-asset category.

Prudential Portfolio Managers was placed fourth in the management company rankings with an average rating of 3.6 PlexCrowns.

It has nine funds that qualify for PlexCrown ratings, and six of these achieved four PlexCrowns each.

PLEXCROWN RANKING OF SOUTH AFRICAN MANAGEMENT COMPANIES TO DECEMBER 31, 2014

1. Coronation: 4.406

2. PSG: 3.975

3. Nedgroup Investments: 3.878

4. Prudential: 3.628

5. Allan Gray: 3.614

6. Marriott: 3.396

7. Investment Solutions: 3.322

8. Absa: 3.272

9. FirstGlobal*: 3.232

10. Old Mutual: 3.154

11. Sanlam Investment Management: 3.114

12. Momentum: 2.856

13. Oasis: 2.807

14. Investec: 2.663

15. Prescient: 2.658

16. Discovery: 2.621

17. Stanlib: 2.527

18. Verso*: 2.442

19. Grindrod: 2.145

* Denotes a third-party manager and therefore not eligible for the Management Company of the Year award.

Source: PlexCrown Fund Ratings

HOW THE TOP MANAGERS ARE DETERMINED

SOUTH AFRICAN COMPANIES

PlexCrown Fund Ratings assigns each qualifying fund a score based on its performance over three to five different measures (depending on the sub-category) of risk-adjusted performance over three and five years. The size of a rated fund of a company relative to the combined size of all the rated funds in that company’s fold in that fund’s broad asset class is used to calculate the said fund’s effective weight in the asset class or main category. The individual fund’s effective weight is then applied to the fund’s rating. The company’s rating for the asset class or category is then calculated using the weighted ratings of the company’s funds in a specific asset class or major category. Fixed weights based on overall industry sizes and skill are then applied to each of the four broad unit trust sectors or asset classes, where the South African equity and real estate weight is set at 25 percent, South African interest-bearing (including multi-asset income) at 25 percent, South African multi-asset (excluding multi-asset income) at 35 percent, and rand-denominated global and worldwide at 15 percent.

OFFSHORE COMPANIES

The returns of FSB-approved offshore fund are measured in United States dollars, and the hurdle rate is the US three-month Treasury Bill rate. To qualify for an overall rating, a management company must have at least one fund in global equity general or global asset allocation (flexible and prudential combined) and at least three rated funds.

HOW FUNDS ARE RANKED BY PLEXCROWN FUND RATINGS

The PlexCrown ratings, on which the Raging Bull Awards are based, are in line with guidelines set by the Association for Savings & Investment SA and criteria set by PlexCrown Fund Ratings:

* Unclassified funds are not rated.

* Gold and precious metal funds are excluded.

* A sub-category is rated only if it consists of at least five funds.

* Only funds with a performance history of at least five years qualify for a rating.

* Pure index-tracking funds are excluded.

* Funds in the South African equity general and large-cap sub-categories that track indices where investment methodologies are involved are rated with other funds in their sub-category.

* Funds in the South African interest-bearing money market sub-category are excluded.

* The Financial Services Board-approved global asset allocation prudential and flexible sub-categories are rated in the broader global asset allocation category.

* Where a fund has more than one class, the returns of the higher-cost A-class fund are used.

* Funds in non-multi-asset and interest-bearing variable-term sub-categories are ranked on a percentile basis over five- and three-year periods according to the Sharpe Ratio, Alpha, Treynor Ratio, Sortino Ratio and Omega.

* Funds in the multi-asset sub-categories (excluding multi-asset income) are ranked over five- and three-year periods according to the Sharpe Ratio, Alpha, Sortino Ratio and Omega.

* Funds in the multi-asset income and interest-bearing short-term sub-categories are ranked over five- and three-year periods according to the Sharpe Ratio, Alpha and Sortino Ratio.

* The funds’ percentile rankings per measure over three and five years are time-weighted by applying weights of 40 percent and 60 percent. The total percentile ranking of funds in the non-multi-asset and interest-bearing variable-term sub-categories are then calculated by applying a weight of 20 percent to each fund’s percentile rankings per measure.

* In the multi-asset sub-categories (excluding multi-asset income), a weighting of 25 percent is given to the four performance measures: the Sharpe Ratio, the Sortino Ratio, Alpha and Omega.

* In the multi-asset income and interest-bearing short-term sub-categories, a weighting of 33.33 percent is given to the three performance measures: the Sharpe Ratio, the Sortino Ratio and Alpha.

* The fund with the highest weighted percentile ranking is therefore the winner in its sub-category.

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