Why fund performance alone is not a track record

By: Ross Reuvers & Edo Bräsecke, Co-founders of Methodical Investment Management

Over the next few months, as we approach our eighth year of business and R8bn in assets under management, invested across asset classes income to global, we will be reflecting on our journey at Methodical Investment Management and examining what makes us who we are. Five years is a magical number in asset management. That’s the point at which you can say you have a track record. Portfolio managers look forward to this moment like a graduation. A fund with 59 months of performance data is ‘untested’. After 60 months, those numbers are finally worth something.

This isn’t meant to be flippant. Every fund manager needs to prove that their approach works. Five years might be a fairly arbitrary line in the sand, but at least it’s a standard. If you want to be taken seriously, you need to have that time behind you. Even so, if anyone had asked us when we started Methodical in 2016 where we would be five years later, we would have told them that we were confident of having at least R1bn in our flagship systematic equity fund. We had a lot of good relationships in the industry, our institutional track record gave us confidence that the strategy worked, and we were optimistic about attracting clients.

In reality, however, the Methodical BCI Equity fund really didn’t achieve the flows expected.

Starting out starry-eyed

That wasn’t through lack of trying, and it certainly wasn’t due to limp performance. From its launch, the fund consistently met our expectations and our clients’ expectations.

But, in hindsight, we were rather starry-eyed when we set up this business. That’s no bad thing. To be an entrepreneur in South Africa, you have to be an optimist. But we did have lessons to learn.

Some of those were more costly than others. In our eagerness to build the business quickly, for instance, we hired too many people. They were great individuals, and good at what they did, but we didn’t need all that capacity from the start.

We also underestimated just how much it would take to gain traction as an asset manager in this competitive industry full of smart people doing great work. Because we were so confident in our strategy and how differentiated it was, we were convinced that it would attract interest.

So, we rented an office, bought the furniture, and hired the staff. All of this was a strain on our capital and without assets coming in, cashflows weren’t yet where we needed them to be.

Reaching a milestone

And then the equity fund hit its five-year track record! And… well… very little changed.

There was no magical moment when lights suddenly started flashing around the fund name in performance tables and our phones began to ring. The portfolio was a top performer, with a distinct performance signature, but that didn’t automatically translate into more investor interest.

We understand now that 60 months of performance is not in itself a track record. Everyone talks about the numbers, but as Methodical has continued to grow, we’ve come to appreciate that you need a business track record too.

Every business needs to settle. We learnt valuable lessons in the process, we had to identify what was necessary, and what really counted. And we had to prove not just that our investment strategy worked, but that the business did too.

Committed to the long term

We’ve seen small managers bought out or merged into other firms, which is why people wait to invest with a new firm. You put their business at risk if they invest with you one day, only for you to be bought out or closed a few months later. Most of all, we’ve learned that you must show that you’ve built a solid base and be really committed to the core principles of the business, like serving your clients and acting with integrity. If you do that consistently, over a long enough period, the business will come.

When we set out, we thought setting up the business would be the easy part, and the rest would follow. It’s proved to be the other way around. Getting the business in the right place, to where it is now, has been the real test.