Choosing the right asset or region is clearly a significant part of any investment decision. But selecting the right manager to make all these decisions is arguably equally, if not more, important. This applies predominantly to the active space but there can also be nuances in indexed investment solutions.
I looked at some MoneyMate statistics on Irish-based funds. I focussed purely on Global Equities, both active and indexed. I grouped the funds by their fund ratings in order to get consistency on their actual experience of risk levels. This should aid comparability across the funds. I then simply looked at the performance gap between best and worst. The results are below (all figures annualised).
| Five Star Rating | One Year | Three Year | Five Year |
| Best | 11.3% | 15.1% | 14.7% |
| Worst | -0.1% | 4.4% | 9.3% |
| Gap | 11.4% | 10.7% | 5.4% |
| Four Star Rating | One Year | Three Year | Five Year |
| Best | 22% | 19.5% | 14.7% |
| Worst | 4.8% | 7.7% | 9.4% |
| Gap | 17.2% | 11.8% | 5.3% |
| Three Star Rating | One Year | Three Year | Five Year |
| Best | 14.7% | 14.8% | 13.6% |
| Worst | 7.4% | 6.4% | 4.9% |
| Gap | 7.3% | 8.4% | 8.7% |
What’s very clear are the significant gaps between the winners and losers. Gaps which can dominate the actual performance of the asset class. And these are all managers essentially doing the same job with a very clear mandate.
So the clear take-away is the critical importance of manager selection in the overall investment decision. Probably no surprise really.
But drilling into the numbers, one other aspect is worth noting.
The data suggests that while the winners can vary over different time periods, there is greater persistence at the lower end of the league table. The same fund can appear in the “worst” section for many years. If things are tough, they can often stay tough for quite some time.
Why might this be?
If a fund has a particular style (such as value or growth) it can be out of favour for very long periods. If it’s hard-wired into the philosophy or label of the fund, there isn’t much remedial action that can be taken. But then you knew this prior to selection.
Even if it’s not as explicit as that, a particular approach may be “hard-wired” into the fund manager!
And so even after disappointing performance there is little questioning or reversal of basic principles. Conviction morphs into stubbornness. This can often be where a fund follows a very distinct or proprietary investment process. Such rigidities offer little prospect of a swift reversal of fortunes.
So in the active world, we can see manager selection matters a lot, But avoiding the laggards is maybe more important than picking the winners.
Tradewinds 