Finding The Route That Suits You

What happens when you have to choose between two funds that both have attractive returns, but find that the one is subject to much greater volatility than the other? The tracking error is a good measure.

- Schalk Louw

It’s a scientific fact that no two people are exactly alike. A few years ago, my family and I took a road trip through the Klein Karoo. Aside from being one of the most breathtakingly beautiful places on Earth, it is also known for some of the world’s most beautiful mountain ranges.

We spent the night in Prince Albert, with Oudtshoorn our next destination. We had the option of two possible routes to take us there. The first was the longer, but faster route via Meiringspoort. The other was the shorter, but somewhat slower route over the Swartberg Pass.

Despite my wife’s fear of heights, our daughters convinced us to take on the Swartberg Pass. The amazing scenery and technical driving skills aside, I realised one thing: Although we reached our destination safely, some found the journey thrilling. Others not so much.

These varying emotions not only apply to adrenaline-inducing challenges, but often also when individuals have to choose between different investment options.

Let’s use two different equity fund managers as an example, where both work for the same asset management company, but manage two different funds.