Deciding where to invest isn’t easy.
Should it be in stocks or bonds? Should you consider property or maybe alternative assets like private equity or credit? What about including an environmental aspect to your investment planning?
But even when you think you’ve got that figured out, there’s the question of who you invest with. This can often matter more than how the asset you’ve selected actually performs. The gap between how a successful and a poor investment manager perform when they both have precisely the same mandate can be significant.
As an example, using MoneyMate statistics, I looked at managers specifically in the Global Equity sector over the past year. I further filtered the data to examine funds within similar risk bands to ensure comparing like with like.
These star ratings are a quantitative assessment of a fund’s past behaviour over a five-year period. Funds are also assessed within risk profiles based on their volatility. This mean we’re not comparing low volatility funds with others who are shooting for the stars.
The results are shown below.
| 5 Star | 4 Star | 3 Star | 2 Star | |
| Best | 10.6% | 17.5% | 12.4% | 15.3% |
| Worst | 0.3% | 4.3% | 3.3% | 0.8% |
| Gap | 10.3% | 13.2% | 9.1% | 14.5% |
(12 months returns Source MoneyMate)
Even over the relatively short term of 12 months, the difference between choosing a successful manager and a poor one was between 9 and 14%.
These are really material differences.
As always there are reasons behind the story. In this particular period, some funds which highlighted dividend yield or dividend growth lagged behind. Managers who emphasised smaller stocks also underperformed. The winners, on the other hand, often had significant exposure to growth type stocks or regions, Other top performing funds benefitted from judicious currency hedging.
Bottom line is there is a wide range of outcomes within a reasonably narrow sector – and I suspect there always will.
It’s also worth noting that these differences in performances far outweigh any difference there might be in the costs that the manager may charge. The gap in what managers charge is likely to be less than 1%.
This highlights a few things:
- fund costs alone should not determine your asset allocation.
- the benefits of rigorous fund selection (and/or of financial planners) should not be underestimated.
Tradewinds 