Better Than Average?
If you are a numbers geek, this wonderful profession of ours provides endless opportunities!?In no way am I suggesting that portfolios should only be constructed using quantitative data, but it does certainly help filter the numbers down. Numbers also allow you to do a great deal of “what if” analysis.
In the funds selection profession, we have tens of thousands of funds to choose from.?Being able to number crunch can provide insights, and below are some of those insights.
Using data to the end of January 2022, and using the UK All Companies sector, and using data (from Financial Express, with income reinvested) going back five years:
Running the analysis over the last 60 months, and then taking this time frame into 5 x 12-month numbers – i.e., rolling year data, we have done some extra work (in essence, the first period is the 12 months to 31 January 2022, the second period is the twelve months to 31 January 2021, the third is the twelve months to 31 January 2020 and so on…)
Considering the output above is only looking at above or below average, and not quartiles or deciles, it really goes to show that consistency is hard to achieve. A fund managers job is not an easy one.
Many fund selectors or asset allocators for instance will therefore put forward the argument of “going passive”.?Although not all passive funds are the same in terms of replication technique, fees, pricing etc, they are broadly similar, so to put forward the output from a passive fund (in this case the Fidelity Index UK fund) here are the numbers.?For reference, the Fidelity fund replicates the wider All Share Index. If we would have chosen a FTSE 100 tracker the numbers would have been MUCH WORSE than those you can see below. For completeness sakes, buying a Mid Cap tracker would have seen numbers better than below.
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Looking above, three years of the last five actually have the passive offering delivering a below average return.?Consistency isn’t easy for the passive manager either. The follow up to the previous point would be how much of an active decision is made to choose between the FTSE, the All Share and the Mid Cap indices.
Investing in risk assets is risky. Patience can be rewarded, and sometimes poor performance in one twelve-month period can be followed by very strong performance in the following 12-month time period.?But poor performance can be followed by poor performance, and good performance followed by good performance.
I’m sure if the research looked at three years, or ten years for instance, then the numbers would be different and the winners and losers different.
This piece only looked at performance. It didn’t take into account volatility, investment style, investment philosophy or comparing different sectors or asset classes.?Consistency is subjective. What is average? Is average good? Should it be what we strive for? What percentage of the returns delivered were down to luck versus skill? How important is the manager? How many of the funds in the universe actually saw fund manager turnover in the review period? What would the outcome be if this research was shifted forward (or back) a month or two or three?
If there was one way of investing, one way which got it right more than wrong, wouldn’t there just be one fund out there for us all to invest in and there not actually be a fund management profession? Different investors want different things from their investments. Markets are complex and dynamic.?Sometimes getting on and riding the investment bus might just be the best option, even if at times the bus takes you to places you wouldn’t ordinarily want to go to.
Have you seen much effect on the quantiles following admission of ETFs Rich? I’m assuming they number fewer in All Cos because the index industry knows the prevailing SPIVA scorecard was less than convincing and the Footsie less appealing until lately? I agree persistency (not snapshot headline returns) should be of more interest to fund selectors.