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Facing forward on a good footing with investments

29 May 2012 Nico Coetzee, Executive: Business Development at PPS Investments
Nico Coetzee, Executive: Business Development at PPS Investments

Nico Coetzee, Executive: Business Development at PPS Investments

How much weight does previous performance carry when it comes to our investment decisions? Can we make our asset manager selections based purely on past returns?

Let’s consider the returns an investor would have achieved over the past ten years (January 2002 to December 2011) when investing in equity funds, but when employing five different strategies.
 (Click on image to enlarge)

Source: Morningstar. Data considers all rand-denominated equity funds over the period.

The red bar indicates the result an investor would have achieved by remaining invested in a composite portfolio of three quality equity funds for the entire ten-year period. The green and blue bars show the returns that would have been generated from remaining invested in a single fund for the entire period (the worst performing and best performing fund in 2001 respectively). The purple bar reflects the return that would have been earned had the investor, at the start of every year, moved his or her portfolio to the previous year’s best performing fund (effecting a total of nine portfolio switches). Conversely, the orange bar indicates the return that would have been generated had the investor moved the portfolio to each previous year’s worst performing fund instead.

So what does the data tell us?

This data shows it’s better to stick to your chosen investment strategy and remaining invested in a single fund or the same combination of funds over the medium to long term. Consider that, in this example, you would have generated a higher return by remaining invested in the worst performing fund of 2001 than had you consistently switched to each subsequent year’s top performer. By trying to capitalise on previous performance you are basing your strategy on market events that have already transpired and are unlikely to duplicate themselves in an identical fashion the following year. In addition, portfolio switches generally come at a cost: Product providers may charge a switch fee while your transaction may further attract Capital Gains Tax.

This is not to say that you can never change your selection of underlying investments, of course. If the funds you are invested in underperform consistently over prolonged periods or your personal circumstances change, discuss the merits of switching funds with your financial intermediary. However, jumping from fund to fund on an overly frequent basis may have a detrimental effect on your ultimate investment return.

A second point to take from the analysis is that it may be easy to find the world of investments a little overwhelming. It is unlikely, for example, that in entering this hypothetical investment you would have chosen to invest in the previous year’s worst performing fund. However, you would have been better off doing so than having chosen the previous year’s best performing fund.

A possible route to take in reducing the risk of making an inappropriate asset manager selection is choosing to invest in a portfolio comprised of several quality asset managers. When considering our funds comparison, it stands out that this strategy yielded the highest returns over the ten-year period under consideration: Over 35% higher than the strategy that came closest. In addition, it also posed the lowest investment risk, indicated in the right-hand graph below by each portfolio’s corresponding standard deviation (a measure of investment volatility):
 

But if choosing even a single asset manager can feel overwhelming, how do you go about choosing more than one? Well, this is exactly where a multi-manager may be of assistance to you or your financial intermediary.

A multi-manger evaluates individual asset managers and the funds they offer to structure multi-managed funds (each comprised of several different individual funds) that serve a range of investment needs. These multi-managers have the qualitative insight to differentiate between different asset mangers’ investment philosophies, to provide the most suitable combination of managers in meeting specific investment objectives and to correlate these managers’ performances in targeting the delivery of consistent returns.

So, even when backing a winning horse could unintentionally see you backing a one-trick pony, there is definite value in obtaining appropriate advice from an independent intermediary and picking the winning side – whether this means choosing a quality single manager or choosing a team of single managers in a multi-managed fund.

 

But if choosing even a single asset manager can feel overwhelming, how do you go about choosing more than one? Well, this is exactly where a multi-manager may be of assistance to you or your financial intermediary.

A multi-manger evaluates individual asset managers and the funds they offer to structure multi-managed funds (each comprised of several different individual funds) that serve a range of investment needs. These multi-managers have the qualitative insight to differentiate between different asset mangers’ investment philosophies, to provide the most suitable combination of managers in meeting specific investment objectives and to correlate these managers’ performances in targeting the delivery of consistent returns.

So, even when backing a winning horse could unintentionally see you backing a one-trick pony, there is definite value in obtaining appropriate advice from an independent intermediary and picking the winning side – whether this means choosing a quality single manager or choosing a team of single managers in a multi-managed fund.

But if choosing even a single asset manager can feel overwhelming, how do you go about choosing more than one? Well, this is exactly where a multi-manager may be of assistance to you or your financial intermediary.

A multi-manger evaluates individual asset managers and the funds they offer to structure multi-managed funds (each comprised of several different individual funds) that serve a range of investment needs. These multi-managers have the qualitative insight to differentiate between different asset mangers’ investment philosophies, to provide the most suitable combination of managers in meeting specific investment objectives and to correlate these managers’ performances in targeting the delivery of consistent returns.

So, even when backing a winning horse could unintentionally see you backing a one-trick pony, there is definite value in obtaining appropriate advice from an independent intermediary and picking the winning side – whether this means choosing a quality single manager or choosing a team of single managers in a multi-managed fund.

 

But if choosing even a single asset manager can feel overwhelming, how do you go about choosing more than one? Well, this is exactly where a multi-manager may be of assistance to you or your financial intermediary.

A multi-manger evaluates individual asset managers and the funds they offer to structure multi-managed funds (each comprised of several different individual funds) that serve a range of investment needs. These multi-managers have the qualitative insight to differentiate between different asset mangers’ investment philosophies, to provide the most suitable combination of managers in meeting specific investment objectives and to correlate these managers’ performances in targeting the delivery of consistent returns.

So, even when backing a winning horse could unintentionally see you backing a one-trick pony, there is definite value in obtaining appropriate advice from an independent intermediary and picking the winning side – whether this means choosing a quality single manager or choosing a team of single managers in a multi-managed fund.

But if choosing even a single asset manager can feel overwhelming, how do you go about choosing more than one? Well, this is exactly where a multi-manager may be of assistance to you or your financial intermediary.

A multi-manger evaluates individual asset managers and the funds they offer to structure multi-managed funds (each comprised of several different individual funds) that serve a range of investment needs. These multi-managers have the qualitative insight to differentiate between different asset mangers’ investment philosophies, to provide the most suitable combination of managers in meeting specific investment objectives and to correlate these managers’ performances in targeting the delivery of consistent returns.

So, even when backing a winning horse could unintentionally see you backing a one-trick pony, there is definite value in obtaining appropriate advice from an independent intermediary and picking the winning side – whether this means choosing a quality single manager or choosing a team of single managers in a multi-managed fund.

 

But if choosing even a single asset manager can feel overwhelming, how do you go about choosing more than one? Well, this is exactly where a multi-manager may be of assistance to you or your financial intermediary.

A multi-manger evaluates individual asset managers and the funds they offer to structure multi-managed funds (each comprised of several different individual funds) that serve a range of investment needs. These multi-managers have the qualitative insight to differentiate between different asset mangers’ investment philosophies, to provide the most suitable combination of managers in meeting specific investment objectives and to correlate these managers’ performances in targeting the delivery of consistent returns.

So, even when backing a winning horse could unintentionally see you backing a one-trick pony, there is definite value in obtaining appropriate advice from an independent intermediary and picking the winning side – whether this means choosing a quality single manager or choosing a team of single managers in a multi-managed fund.

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