Fund selection process

Daberistic Wealth Management

Independent investment advice and coaching that give you performance, protection and results.

Our fund selection process

We believe our rigorous fund selection process differentiates us from 95% of the financial advisors in the industry. This process yields superior results for our clients over the long term.

Daberistic Wealth Management pays particular attention to selecting funds. We use our many years of experience to develop our unique, proprietary technology in selecting funds. We go through the following checklist, in more or less this order, when selecting funds:

1. The investment management company

We start by analysing investment management companies, in terms of its history, investment philosophy, people, processes, and capacity. We also compare its actions against what it says it will do.

Specifically we ask the following questions:

Is it registered with the Financial Services Board in South Africa?

Has it been in existence for 10 years or more?

Investment philosophy – does it have a strong value investing philosophy?

Capacity – does it have the necessary human capital to execute the processes?

Investment processes – does it have a rigorous investment process? Is it consistent with its stated investment philosophy?

2. The portfolio manager

We check the credentials of the individuals that manage a particular fund, in terms of their academic qualifications, and number of experience in the investment markets. As markets go through cycles, and cycles can last between 5 to 10 years, we would want to ensure a portfolio manager has managed money through at least a complete cycle.

Specifically we ask the following questions:

Does the portfolio manager have the relevant professional qualifications – e.g. CFA, CA, MBA, Actuary.
Does the portfolio manager have 10 years or more relevant experience?

3. Past performance

We analyse funds in terms of:

Absolute performance
Relative performance to the relevant benchmark
Its performance relative to its peers in the same sector

Over 1, 3, 5, 7 and 10 years

We search for consistently performing funds.

4. Risk management

We look for funds that have great emphasis on risk management, specifically managing downside risks.

We analysis risk statistics to understand the risk characteristics of funds. Specifically, are the returns stable or volatile? We use the following measures over a minimum period of 5 years (preferably 10 years):

•   Standard deviation
•   Maximum drawdown – important, measuring the maximum % loss experienced by an investor
•   Sharpe ratio – for the same type of funds, the higher the ratio, the better
•   Sortino ratio - for the same type of funds, the higher the ratio, the better
•   Correlation – we want to select a portfolio of funds with lower correlation of performance to one another, to capture the benefit of diversification.

5. Independent fund ratings

We make use of four well-known independent fund ratings in assessing the quality of funds:

Funhouse - focus on the qualitative assessments, in terms of management, investment philosophy, processes, people, succession planning and past actions.

Plexus PlexCrown - evaluates risk-adjusted returns of funds, five crowns denote the best funds, whereas one crown denotes the worst funds. Its PlexCrown Fund Ratings are used in the determination of annual Raging Bull Awards.

Morningstar - international fund rating agency

Citywire - global fund rating company

6. Total expense ratio (TER)

Fund management costs eat into the returns for investors. While professional investment managers should be appropriately rewarded for their expertise and outperformance, the fund management costs should also be reasonable for a sector of unit trusts. We believe in the following guidelines for TER:

South Africa – local general equity funds: up to 2.0%
South Africa – local equity index trackers: up to 0.5%
South Africa – balanced funds: up to 1.5%
South Africa – multi asset low equity funds: up to 1.25%
South Africa – income funds: up to 1.0%
Global – general equity funds: up to 2.25%
Global – multi asset high equity funds: up to 2.0%
Offshore – general equity funds: up to 2.0%
Offshore - multi asset high equity funds: up to 1.5%
Offshore – equity index trackers: up to 0.5%

7. Fund size

If the fund size is too large relative to its investment universe (investment company controlling >5% of total market cap), it may be difficult for the investment company to invest in illiquid, mid- to small-cap stocks. It will therefore be difficult to manoeuvre to outperform the market.

On the other hand, we also steer clear of small funds (typically less than R1 billion in size), as it may have capacity constraints, liquidity issues and higher expense ratios.

8. Client's needs

We conduct a financial needs analysis and risk portrait of the client.

Given the client’s needs and risk tolerance, we will construct a portfolio of funds based on the above 7 criteria.

9. Market conditions

Be aggressive at trough, be cautious at the top.

Sometimes due to extreme market conditions, we may adjust the portfolio construction to reduce the downside risk of a market correction, or to take advantage of a depressed market.