“Obsession” is probably too strong a word to describe the investment industry’s focus on manager performance league tables, but they certainly do receive a lot of scrutiny.
There’s nothing wrong with the information the surveys contain – they are accurate; they typically cover short, medium and long term periods; they cover diversified funds and sector specific funds; and, they show returns in a range of tax environments as well.
It’s more the conclusions that are drawn from the surveys that are sometimes cause for concern. At its most extreme, performance league tables showing manager returns from best to worst can lead to an unfair assessment of a manager.
To get the most out of performance league tables and reach a correct conclusion about a manager’s peer relative return positioning requires a lot of extra information (which unfortunately is usually not included in the surveys or is time consuming to find).
Here is a summary of the questions and answers that are most relevant to correctly interpreting the performance of one fund versus another:
– what are the investment objectives of the funds in the survey? Are they market relative return oriented, peer relative, inflation plus and are risk controls applied?
– One or all of the above considerations will influence the asset allocation of the funds and therefore have a bearing on absolute and peer relative returns. Of greatest importance in explaining the return of one fund versus another is the allocation to growth assets such as shares. In some surveys of “growth” oriented funds, funds with 100 per cent or above allocations to shares are being compared with funds with 85 per cent in shares. Its obvious that when shares are strong or weak a fund with an allocation difference of just a few percent will have a material return impact versus other funds
– Within the allocation to shares, how much is Australian shares and how much is in global shares. This can have a material impact on a fund’s return versus others because the difference in the performance of the Australian share market for much of the last ten years has been higher than global shares. For example, the Australian shares index return (ASX300 Accumulation) in the ten years to 31 August 2010 was 7.3 per cent per annum versus -4.4 per cent by the MSCI World Index (unhedged). Fund managers who prefer the diversification benefits of global shares allocation have clearly experienced a performance headwind compared to funds with a preference for Australian shares.
– Understanding whether a fund’s allocation to global shares is managed on a hedged, unhedged or partially hedged basis is also important, especially in recent years when the Australian dollar has strengthened considerably. For example, the Hedged MSCI World Index return of +5.3 per cent in the year to 31 August 2010 was considerably better than the -3.3 per cent unhedged return.
– Is a fund’s listed property exposure Australian centric or global in nature. Considering the massive performance differential between Australian REITs (+6 per cent) and Global REITs (+23 per cent hedged) in the last year (to 31 August), a fund with a preference for global would clearly benefit more than a fund with an Australian only strategy.
– What is in a fund’s bond strategy – is it largely Australian or does it have a mix of global and Australian bonds? How much is in cash? Is it weighted towards investment grade or non-investment grade bonds? Short or long duration? Et cetera.
– How much has a fund invested in unlisted assets? As we have seen in the last couple of years, the lag in the valuation cycle of unlisted versus listed assets has seen highly rated funds a couple of years ago fall to the bottom of the performance rankings, and vice versa.
Judging a manager based purely on their position in a performance league table is the wrong way to do it. You need to bring in a lot of additional considerations into the process to ensure you’re making an “apples with apples” comparison. Doing so is not wasted effort because they are the same considerations you should be thinking about when devising an investment strategy that is right for your circumstances.
John Owen is a senior investment specialist for MLC.
What a load of rubbish. The static or strategic managed fund system is flawed and fund manager remuneration as a percentage of FUM means they are conflicted. I believe fund managers have excellent research analysts who can determine whether a particular asset or class of assets is over or under priced but they never adhere to that data. Why would they hold and continue to invest in over priced assets when their research dictates that they should sell. Don’t counter with it’s “time in”, not “timing” the market that determines the wealth growth for an investor. If an investor wants to get wealthy he needs to determine when the asset is under priced and invest and determine when it is over priced and sell. In addition he needs to analyze the fow of money into and out of an asset class to determine the direction of the price of that asset class. Fund managers will never vary from the benchmarks because of their business risks.