One matter that the investment industry and its participants could have done better over the years has been developing consistent performance measurement standards. Had these existed, we may be spared reading the superficial analysis that is commonly found in the media when manager returns are being discussed and reviewed.

Here are a number of issues that need to be considered when reviewing, assessing and comparing manager returns:

1.    Return after fees and tax is what matters most to the end client. This is what they get in their hand, not returns before fees and tax. There are too many managers who ignore or, at best, pay only lip-service to the tax consequences of their stock selection decisions. This is especially so for high turnover managers. Stock brokers may love them but for the end client, the gap between their pre and post tax returns may be considerable.

2.    Make sure your assessment period is long-term not short-term. Performance league tables usually do provide performance stats over varying periods, both short and long term, but unfortunately it’s the short term returns (usually one year) that get publicised. One year returns are inherently useless. Markets can demonstrate considerable volatility short term and so do manager returns. There is very little information in one year returns.

3.    Performance history is interesting but that is all it is – history. Performance league tables provide little useful information when looking to the future. The past performance of a manager says nothing about their performance potential from here. Just because a manager appears favourably in a performance survey doesn’t mean the manager will do well in the future, nor will the underperformers continue to underperform. A page of manager returns doesn’t reveal anything about the causes of a manager’s return – is their style out of favour, were they lucky/unlucky in their stock selection, etc? That is why manager hire and fire decisions are better based on qualitative insights and identifying features intrinsic to a manager that may enable them to perform well in the future.   

4.    Performance league tables often fail to compare ‘like with like’. How often do we see the returns of a manager with 85 per cent in growth assets being compared against one with an allocation of only 70 per cent in growth assets? Just as bad is a comparison of funds with a bias to unlisted assets versus managers biased to listed assets. Irrespective, if the survey of returns isn’t like with like, naïve comparisons with meaningless and misleading conclusions are the ultimate outcome.

5.    Most performance league tables are ‘point-in-time’. The most relevant and useful performance analysis is one that provides information on how a fund manager has performed through time in different market and economic circumstances. A performance statistic that is date specific provides little useful information and can lead to incorrect conclusions about managers.

John Owen is a senior investment specialist with MLC Investment Management

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