Fund management - Why? Why? Why? – all you wanted to know about investment and didn’t dare to ask
“These chips will take your money
Shake a young man down
It's the same in every one of these
Sorry river towns”
Mark Knopfler – River Towns (from Tracker)
In a recent article, the Economist was mulling over the question why fund managers do not perform consistently.
So, what has been the trend over the past years? Well, the big shift has been from active – company picking, like I’m doing – to passive – buying an ETF or passively tracking a benchmark by buying the shares that compose an index. Why? because it’s cheaper. But investors are happy to pay more if it translates into a better performance. Active fund management is a difficult exercise, as I can testify from my experience. The average fund fails to beat the index. Our Swiss equities strategy has beaten the index 5 out of the last 8 calendar years, including 3 years in a row: 2014, 2015 & 2016. Even though we are in positive territory, we are currently below our reference index year-to-date. You, the Investors, hope that the strategy will deliver superior returns over the long term, even if you can’t expect its fund manager to beat the index every single year.
The industry’s answer to this problem is to launch a lot of funds. Some of them are bound to be near the top of the charts and can be marketed aggressively and the losers can be killed off. In the US, almost 30% of the worst-performing equity funds over the 5 years to March 2012 were merged or liquidated by March 2017.
The article goes on to ask:
“Why doesn’t fund management conform to the rules of professional sports, where the Cristiano Ronaldo’s & Roger F’s of this world consistently outperform their rivals?”.
One reason is the “iron law of costs”, meaning that successful managers attract most of the money, their funds grow and resemble/replicate the market.
Our Swiss equities strategy is a capacity constraint to CHF 80-100 mn maximum.
Another reason is the style: value approach, growth approach, you name it. Our approach is to assess with accuracy the real value, i.e. the intrinsic value, of the corporates in which we are invested, so that in the long term this strategy outdoes the passing fads & fashions, like sector funds, theme funds, etc.
Last but not least, do you know for how long the average fund manager runs a portfolio? The answer is 4½ years. So if you pick a fund based on his or her track record, chances are that a new person will be in charge when you invest. Why? Because most of these managers are employed in mid to big firms. They are not self-employed. And so their careers take priority to anything else, including the management & the performance of “their” fund.
The article concludes: ““The old saying that past performance is no guide to the future” is not a piece of compliance jargon. It is the truth.”