2 months ago

Blue Chip Issue 79

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This 79th issue of Blue Chip focuses on the art, science and business of investment. Blue Chip is the financial planner’s chaperone to everything investment and this edition is a smorgasboard of the choices, decisions, lessons and associations that relate to it.


INVESTMENT DECISION-MAKING Binary thinking, what-ifs and why it helps to disagree with yourself “I feel I change my mind all the time. And I sort of feel that’s your responsibility as a person, as a human being – to constantly be updating your positions on as many things as possible. And if you don’t contradict yourself on a regular basis, then you’re not thinking.” – Malcolm Gladwell We live in a world of complex problems. Each day we need to make decisions that affect our lives and those of our clients and colleagues. We are also subject to the decisions of others – business leaders, governments, central banks and other role-players in a global economy where singular decisions have far reaching implications. Examples of these complex and divisive problems today include how a country manages their lockdown and reopening of their economy, or how a central bank decides to manage its stimulus package to bail out companies and individuals. On a day-to-day basis we are also faced with complex problems around emigration, investing and financial planning. Within companies, 16

INVESTMENT DECISION-MAKINGINVESTMENT the decisions to advisor’s retrench staff business. or acquire The competitors, advisor has and the to make long-term decisions ability in the to face consistently of huge uncertainty. and efficiently These topics implement and many others their frame investment the question advice of how we deal with complex across their problems, client and base how by using we should a range develop a thought process of to portfolios ensure we through are making a Discretionary the best decisions. The concept Category of “binary II thinking” licence, either relates that to the of the idea DFM, that when faced with complex or their decisions own. as those illustrated above, we are prone to oversimplifying A fourth the benefit problem of outsourcing to arrive at convenient to a answers. We do DFM this is to one remove of governance the anxiety and compliance. such a complex problem might The present DFM for should us. This be is able false to comfort. ensure The that trouble with this decision similar process clients is that are we tend treated to place consistently more emphasis on those facts we (and personally therefore agree reduce with TCF and concerns), avoid the that opposing facts, which detract the from advisor our has argument. a documented This leads investment to conveniently simple, yet potentially process, misleading, and that “yes comprehensive or no” type decisions. due For example: diligence “Should is I provided take my money the funds offshore used. now? Yes, I should, because The this RDR lockdown discussion will kill paper our led economy.” to many This is a current example claims that that we independent are seeing quite financial often advisors as anxieties are high. The convenience (IFAs) would struggle of using to a survive single point and thrive of view to support an especially once RDR important is implemented, and complex and decision that IFAs excludes the wide spectrum would of other need pieces to either of information sell their business that should to be considered at the a corporate same time: or outsource to a DFM. The upside is you are now faced with a more balanced view to the decision you need to make and are then able to make an informed choice. This may not necessarily change your ultimate decision, but it may temper the extent of what action you take and will also hopefully set out the facts on which the decision was made for future reflection. By considering a much broader spectrum of “what ifs” we can also build better investment portfolios. This concept lies at the heart of diversification. • “I may believe that equities are cheap, and I may also observe that they are cheap, but what if I am wrong?” In many cases equities today are cheap, but are they cheap enough given the issues? • “Fund Manager X is exceptional, but what if their business cannot survive?” Many good fund managers do not deliver good investment returns, for other reasons. • “Growth shares look massively overpriced, but what if these shares don’t disappoint in future?” Growth shares are at their highest premium ever to value shares so one would naturally be a seller of overpriced growth shares. • “South African property is a safe investment, but what if our • “How cheap are We South do not African agree assets with that and assertion. do they We present long-term a economy business suffers partner a prolonged to an advisory recession?” • Global (This and question local portfolio would construc good opportunity, believe despite that the the majority lockdown? of investment If I take my IFAs money business. have been useful a few years ago.) capabilities. offshore, I will do miss not this have opportunity.” to make material changes in We believe that the two most important • The skill and relevant experience of • “Is the rand cheap? their business Am I taking to money comply offshore with RDR, at a and bad time? factors that advisors The need concept to consider when “binary core thinking” investment team. Or is it the dollar we do which not is believe expensive?” that this should be the choosing a DFM are: • The DFMs back-office compatibility • “Are global assets reason not for overpriced? using a DFM. I would It is an be added selling low/ • Understand the unique relates value proposition to the idea the advisor’s that current processes. buying high.” benefit but should not be the key driver. of the DFM given how different the • The scale of the business. when faced with complex • “What is my ideal In level summary, of investment the services in South of Africa a quality relative to various DFMs’ offerings are, and how • The fee structures. offshore and how DFM does can benefit my current a financial allocation advisor compare?” in the this value proposition decisions, complements we the are prone to following ways: advice process. In our opinion, DFMs do have an impor This highlights • An some of evidence-based the more practical investment questions we could • Make sure oversimplifying that there is a good culture the role problem to play in helping to advisors use to test the decision philosophy we arrived and process at to start. that However, aligns with there are and philosophy arrive fit between at convenient the advisor professionalise answers. and grow their busines also a second set the of questions, business’s advice which framework relate to the numerous and the DFM. ensure consistent investment outcom alternate outcomes • A sustainable that would investment be direct range conflict that with is your Meeting these This considerations internal testing will of decrease your assumed improve point communication of view can to clients current view. These able require to cater more to different mental client fortitude needs to consider the probability come across of “buyer’s as indecisive, remorse” low from conviction enable advisors and fence-sitting. to focus on their core properly. These • are Consistently the “what if” questions: managed portfolio an advisor The investment who is getting industry something encourages high of giving conviction, comprehensive definitive financial ad • “What if South solutions Africa emerges across the from client this base lockdown in better different answers from and what decisive they expected, actions. What and if this to clients. is wrong? shape than I expect, • Access while to a dedicated the rest of team the world of investment struggles?” ensures that Being when comfortable differences forming of opinion your • “What if it is proven specialists over time, that the tough decisions emerge, our own there opposing is common views ground is a critical and government is • making Consistent today allow and us to cost-effective recover more quickly respect function between when the parties building to allow investment for a than other economies?” implementation across different compromise portfolios. that does When not binary disadvantage decisionmaking is all around us, as it appears • “What if global investment investors flock platforms to South Africa assets because the client. they offer an • attractive Constant yield?” compliance with the various regulatory requirements. Key factors be today, investigate we need to when take carrying caution, out your step due back, diligence and consider the DFM a options broader In doing this, you are taking the opposite side to your own include: range of scenarios on which to argument and not All DFMs just adding are not further created testing equalto your existing • Whether base the our DFM views. is independent The answer and is argument. You are Advisors essentially are clearly disagreeing spoilt for with choice yourself. given This is how a usually important somewhere independence between, is to the tough mental process all the DFMs to consider now operating properly: in South Africa. advisor. in the uncomfortable grey area “But the test However, of a first-rate because intelligence they are still is the a relatively ability to hold • The which investment exists between philosophy the yes and two opposed ideas new in concept mind at to the many same advisors, time, and choosing still retain a the performance the no. history of the DFM. ability to function DFM or, can in this be overwhelming. case, I’ll say the The ability right to DFM invest. • To The depth of the DFM’s global and local invest well. To hold has over the potential time that to which be a deserves transformative, to be held.” [1] research [1] David capabilities. Gardner, The Motley Fool Ian Jones, CEO, Fundhouse 17 2

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