BLUECHIP2025 DFM GUIDE -
BLUECHIP2025 DFM GUIDE - INTRODUCTIONHow important is investmentperformance for a DFM?As Discretionary Fund Managers differentiate their offerings,how should the advisor measure a DFM’s success?In the opinion of many Discretionary Fund Managers (DFMs),investment performance is the most important thing that a DFMneeds to deliver.“Performance matters. It’s crucial. Performance is what theclient expects and pays for – nothing else,” Leigh Kohler, head ofDFM at INN8 Invest, believes. A DFM proves its value to clientswhen the DFM consistently meets the objectives of the client ona net-of-fees basis, he adds.A DFM is an asset manager and must be able to evidence aprocess and track record like any other investment manager,Brandon Zietsman, global CEO at PortfolioMetrix, says.It would be inconsistent for DFMs to highlight the rigour oftheir own manager selection processes but be unable to presenta performance track record that would survive the same scrutiny,he adds. Clients pay the DFM fee and can reasonably expect theiradvisors to have properly kicked the tyres of the DFM, he says.Palesa Dube, independent financial planner, founder ofCentillion Wealth and recent winner of the Financial Planner ofthe Year, agrees. She says above all else, her clients want to seetheir investment portfolios grow.Other factors wrongly prioritisedZietsman believes it is concerning that the peripheral services thatDFMs are offering advisors – regardless of how important thesemay be – are resulting in performance being swept aside as adeciding factor when advisors choose a DFM partner.He cites a recent survey by NMG Consulting, where advisorsranked the factors they considered when choosing a DFM and12
2025 DFM GUIDE - INTRODUCTIONBLUECHIPperformance was ranked 9 out of 15 factors. Zietsman believesthat DFMs should not get off so lightly.He continues that before advisors outsourced investmentdecisions to DFMs, they made investment choices by comparingthe funds of leading managers and they were absolutely interestedin the pedigree of the performance and the track record, so whyshould they not be interested in how a DFM’s portfolios perform?Zietsman points out that a one percentage point differenceover 30 years can result in a 30% difference in the savings outcomeand therefore a fundamentally different retirement prospect.Being insensitive to the performance bona fides of the DFM ishazardous and even risky from a regulatory perspective, he contends.Lack of transparency on performanceThe lack of transparency about the performance of DFM portfoliosis a problem that makes it difficult for advisors to compare theoutcomes achieved by one DFM with another, or by a DFM and amulti-manager or single manager.Performance should be rated net-of-fees (investment fees)and DFMs should provide fact sheets that enable comparisonsof performance, in Kohler’s opinion. He adds that unfortunatelythis is not the current reality as very few DFMs have fact sheetsavailable on their websites. He believes the industry needs tocreate standards and more transparency.There are some providers who have started providingperformance comparisons via awards and creating comparisonplatforms and this provides probably the best way to understandperformance on a comparative basis, in Kohler’s opinion. Hebelieves that there is a lot more to do and DFMs who benefitedfrom asset growth from a first-mover advantage, are keeping theircards closest to their chests when it comes to performance.Ian Beere, chairman of Netto Invest, says it is important toconsider risk-adjusted returns – the diversification and the levelof downside risk of a portfolio needs to be evaluated togetherwith performance.Opaque performance riskZietsman argues that if as an advisoryou cannot establish transparent andcomparable performance data, then youare in a risky position with your client andyou cannot claim you have dischargedyour fiduciary duty.Either you need to be able to check theDFM’s performance track record – becausemany of them manage transparent andcomparable unit trust funds – or the DFMneeds to provide some other track recordthat is verified by a third party. Advisorsshould beware of “paper portfolios” – backtestedportfolios – and performance trackrecords cherry-picked from a number ofsimilar mandates managed for differentadvisors, he warns.Zietsman argues further that it is notdifficult for DFMs to publish performancedata that complies with the globalinvestment performance standards (GIPS);and while DFMs are differentiated by being service providers,they will always be active managers and must like any assetmanager be able to produce a track record that complies with theglobal standards or they should not be charging for what couldbe inferior outcomes. Where portfolios managed by the DFM anadvisor has chosen perform particularly badly, the advisor needsto be able to show that they had checked the performance dataprior to appointment. Performance and not peripheral servicessuch as assistance with compliance or the quality of their factsheets that make advisors’ lives easier is the acid test, accordingto Zietsman.Comparing performanceDube says in selecting a DFM, Centillion assessed how the DFMreports its performance to ensure that the process was accurateand client-friendly.Over and above this, Dube says she uses a complementarysystem that enables Centillion to compare the reportedperformance independently.Craig Gradidge, independent financial advisor and co-founderof Gradidge-Mahura Investments, says performance is easier tomeasure when a portfolio is managed as a unit trust rather thana model portfolio. Unit trust performance is transparent as funds’returns are reported by third-party data providers and funds areranked in categories with similar investment universes.ConclusionWhile it is clear from the opinions cited above that investmentperformance is undoubtedly a key measure of the value andsuccess of using a particular DFM, it is important neverthelessthat clients are achieving all their goals. An argument could bemade that the issue is less about whether DFM performance isbeing compared against other DFMs, and more about whetheradvisors are happy that clients are meeting their goals and/or themodel portfolios are achieving what they set out to do.13
