Page 107 - Profile's Unit Trusts & Collective Investments - March 2026

Investment risk Chapter 6

when bond funds have topped the ranking tables quarter after quarter as a result of falling interest
rates. In times of rapid and steadily rising interest rates, however, the prices of bond funds will fall in
spite of the best efforts of portfolio managers.
These are just some examples of the tremendous variation which occurs in the performance of
different sectors under different market conditions.
To maximise returns over the short term, the portfolio manager of a multi asset fund obviously
needs to concentrate his or her investments in the best performing sectors. But doing this means
he or she runs the risk of being in the wrong sectors at the wrong time. For this reason, having all of
the assets of a portfolio in any one sector (as happens with a theme fund) is considered high risk.
Nevertheless, more aggressive funds may choose to exploit these market trends by switching
their investments into sectors that they feel are due for a re-rating. “Playing” the market in this
way demands a much more active approach to investment management – and while it increases
potential returns, also increases risk.
Fund/portfolio manager risk
The performance of any collective investment scheme is at least partly dependent on the decisions
made by the portfolio manager. This is more true of aggressive funds and flexible multi asset funds,
and obviously less true of conservative funds with rigid mandates.
As in any sphere of human endeavour – be it athletics or asset management – some people have
more talent than others. One way of achieving superior returns via collective investments is to follow
the star of a talented portfolio manager. Certainly, some fund managers seem to have a particular
talent for stock picking or market timing, and backing the next “Warren Buffet” could, of course,
lead to superior returns. But the risk is that the next rock-star stock picker turns out to be the next
fallen-star fund manager.
The problem, of course, is that there is no guarantee that a particular portfolio manager’s talents
will stand up under all market conditions. Increasing an investor’s reliance on the skills of a particular
fund manager exposes the investor to the risk of that fund manager failing to perform.
Diversification is, again, the easiest way to reduce fund manager risk. Fund manager risk can be
ameliorated by opting for a multi-manager investment option, or by investing in two or three different
funds with different management styles.
Organisational and asset risk
One aspect of organisational risk is the danger of a fund manager going out of business
or deliberately defrauding investors. While one shouldn’t dismiss this entirely, the collective
investments industry is well-regulated and there is little chance of investors losing money through
fraud or insolvency if they are invested in FSCA-registered funds.
Asset risk is the danger of insolvencies within a fund’s portfolio. The delisting of African Bank
(Abil) in 2014 brought this home to the local market. An asset that has to be written off clearly has a
negative impact on performance. In the case of Abil, which was rescued from insolvency but could
no longer be traded, unit trust holdings in the company had to be ring-fenced via a process known as
side-pocketing. After side-pocketing investors selling unit trusts are left with partial holdings that are
“frozen“ until further notice – in effect, part of the investor’s value cannot be redeemed.
Another aspect of organisational risk relates to the impact of high-level policy decisions, mergers,
changes of ownership or major staff movements.
Collective investment schemes are, theoretically, outside of this activity, but there is no doubt that
performance tends to suffer when the umbrella body is in a state of flux.
Asset management teams often report to a controlling life house or institution, and the culture
and management style of the “parent body” can have a considerable impact on the long-term
performance of a fund. A good asset management company needs to have a clear and consistent
philosophy, stability of staff, good administrative systems, a research capability and a long-term
commitment to the industry. On the other hand, an asset management company cannot afford to
become staid and inflexible, offering no career path to younger fund managers.

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