As we know, it’s dangerous to rely on a single time period when assessing how funds have performed. How much better, then, it would be if we could evaluate which funds have been consistently good performers – the funds which have come up with the goods for their investors year in, year out. Consistency like this sometimes seems to be an under-rated virtue in the world of funds management – it doesn’t feature as highly as it could do in many fund managers’ advertisements, for instance – and yet it’s a far more meaningful indicator of success at funds management than relying on shorter-term or one-off results.
Assesing Consistency
In order to identify which share funds have been most consistent at producing strong returns for their investors, and those which have consistently produced poor peer-relative outcomes, we screened our database to identify the retail and wholesale large-cap Australian share unit trusts with performance track records stretching back over the past 10 years. These are the funds which have returns for each of the past 10 calendar years from 1998 through to 2007.
There are fewer of these than you might think. Although we had 599 large-cap share funds on our database at the time of writing, only 112 of these – 18.69 per cent of the total – had 10-year track records. This is another reminder of the legions of options spawned by the apparently inexorable growth in mastertrusts and similar administration and distribution platforms.
Our next step was to rank these 112 funds by their total return for each of the calendar years from 1998 through to 2007, and then to segment these returns into four quartiles. For each year, we assigned a quartile ranking of 1 to the funds with returns among the top 25 per cent of their peer group, the second 25 per cent a quartile ranking of 2, and the third 25 per cent a quartile ranking of 3, down to the bottom 25 per cent of share funds, which we gave a quartile ranking of 4.
(A word about fees. In this exercise, we’ve included both retail funds, which come with lower investment minimums and higher ongoing fees, and wholesale funds, where the reverse is the case. Because the returns we publish are after ongoing fees, and because the fees for wholesale funds are lower, this has tended to favour these lower-fee wholesale funds over their pricier retail counterparts.)
The Results
Table 1 shows the Australian share funds which have spent 80 per cent or more of the time over the past 10 calendar years – eight or more of these 10 years, in other words – in either the first or second quartiles. We can see from this that Colonial First State Wholesale Australian Share Core spent 30 per cent of this time (three of these 10 years) in the first quartile, and 70 per cent of the time (seven years) in the second quartile, while never featuring in either the third or fourth quartiles. Similarly, Barclays Managed Investment -Australian Share has spent nine of the past 10 calendar years in either the first or second quartiles.
Table 2, on the other hand, shows the funds which have been persistently poor performers – those which have most consistently been in the third or fourth quartiles over the past 10 calendar years. The table shows that ipac Strategic Investment Service – Australian Share has spent 60 per cent of the time (six of those 10 years) in the third quartile relative to peers, and 40 per cent of the time in the fourth quartile. Likewise, Commonwealth – Australian Share has spent nine of the past 10 calendar years in the third or fourth quartiles.
We can go further with this analysis, and identify the funds which have consistently been among the top 25 per cent of this peer group, and similarly, those which have consistently been among the worst-performing 25 per cent (consistently fourth quartile). Table 3 shows the funds among our universe of 112 options with 10-year track records which have spent more than five of these 10 years, or 50 per cent of the time, among the first quartile. The most consistently best-performing share fund was Ausbil – Australian Active Equity, which we can see from the table has spent 60 per cent of the time (six of the last 10 years) among the first quartile.
Table 4 reverses this exercise to show the share funds which have most consistently been fourth quartile, or those whose annual returns over the past 10 calendar years have placed them most frequently among the bottom 25 per cent of the peer group. This shows that the most consistently worst-performing share funds have been Advance Imputation and Advance Imputation NEF (nil entry fee), whose underlying investments are managed by Maple-Brown Abbott. (Market conditions recently have not favoured this fund manager’s value style of investing.) These funds, along with Macquarie – Active Australian Equities, have all spent seven of the past 10 years (or 70 per cent of the time) in the fourth quartile.
This exercise has shown us which funds have been strong performers compared to their peers not just for the past year, or even for the year before that, but consistently across several market cycles and during periods which have favoured both growth and value styles of investing. Consistency is a better way of assessing fund performance than relying on any one-off time period.
But even this has its limits. For one thing, the endemic turnover in funds management talent over the past five years – fuelled in particular by the growth of that phenomenon, the boutique funds management business – means that many of these share funds are no longer being run by the same people responsible for choosing their stocks three, let alone five or 10 years ago. That’s why it’s also important to keep a close eye on who’s actually managing the money – or to put it another way, if you think of a fund as a car, who’s currently behind the driving wheel, not who the driver was hundreds of kilometres back.
