It is standard practice across the financial services industry to display fund performance data for periods of five years. Yet in our view investors need to handle such data with care and delve behind these figures for a number of reasons, not just the usual one that “past performance is not necessarily a guide to the future”.
Firstly, according to academic research, the average period of a business cycle in the UK since the second-world war is 5.6 years (source: Bergman, Bordo and Jonung). This means that a five year period of assessment may not cover a fund manager’s experience across a full range of market environments. We believe there is merit in backing fund managers who have demonstrated they have delivered good relative returns through both good and bad times.
Secondly, it is a simple fact that the performance numbers on a fund may not necessarily represent the record of the manager now running it. Fund managers retire, they change jobs, go on sabbaticals and from time to time funds are merged, obscuring track records. We estimate funds typically change manager once every four years but some have done so much more frequently. For example, the Scottish Widows UK Growth fund has seen no few than 8 managers since 2001.
While some funds are managed with genuinely team based, or automated approaches, in many if not most cases, actively managed investment funds rely on a key decision-maker. For this reason, our research team places a high emphasis on analysing the full career track records of fund managers across the businesses that they have worked for.
Our goal when analysing career track records is to try and sift those managers with genuine talent from those who may simply have “got lucky” over a particular time period. There are a number of ways we do this, which include charting their career performance against the relevant benchmark, looking at the ratio of months they have beaten versus underperformed their benchmark, measuring their average monthly return against the benchmark and by statistically estimating the probability that the returns generated were down to skill.
The more data that is available, the more meaningful insights can be gained. Yet we broadly estimate that only 18% of current UK onshore open-ended funds are managed by individuals or teams with publicly identifiable track records managing similar funds for periods equating to at least 10 years of data. That figure more than halves once a longer time period of at least 15 years is applied.
Does this mean most funds are managed by inexperienced managers? In some cases certainly, as new faces emerge all the time, but in others it may be that the manager previously ran an institutional account or a fund in a different sector, making it difficult to get full visibility or a like for like comparison.
Not only is it therefore vital to analyse the record of the manager who is managing a fund today, it is clearly important to reassess the case for holding a fund when a manager change occurs. There are many examples where fund changes have been followed by deterioration in performance and others where laggards have been transformed by fresh management. In summary, when you decide to invest in an actively managed fund, it is the start not the end of a journey. This is why Bestinvest places such a high emphasis on monitoring funds and reviewing our ratings, to help our clients keep ahead of the game.
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