As an investor, you may sometimes wonder whether you have your money in the right fund or the right market? You may hear stories of the top performing funds and wonder why the ones you pick don’t do as well. It can be a frustrating experience, and that is where the investment adviser comes in to guide you towards the very best performing funds. But who advises the financial adviser? The good ones will take input from specialist researchers, who dig deep to
Generally, an investment adviser selects funds after reviewing past performance of a small number of funds, and then, in practice, maintains a short list of his or her favourites. This is not a system that is likely to deliver the best returns for the client. In today’s high stakes investment markets, it is unrealistic to expect any investor or adviser to have a broad knowledge of the global fund opportunities. That is why independent analysis, designed to highlight the very best managers for a variety of investor needs, is so important.
A company dedicated to researching individual funds and assessing those most like to produce consistently high returns can add considerable value to your investment portfolio in a very short space of time. Investment success is all about being in the right place at the right time. This doesn’t happen by chance. There is a much higher probability of success if your decisions are supported by objective, detailed research.
The alternative is an over-reliance on statistical data about fund performance and a tendency to look backwards rather than forwards. The statement about past performance being no guide is true. It is an indication of who are the best managers, but it will not help you decide which funds will provide the best returns in the market conditions that exist now.
Categorisation is another problem; without independent research to support fund selection, the investor may not be getting what he expects from a fund. The manager may be taking more risk in the portfolio than is apparent from a cursory inspection. Or the fund may not actually be invested in the market segment chosen by the investor, highlighting the inaccuracy of fund categorisation. At the same time, statistical analysis will not show to what extent the manager is in control of the portfolio, or, for example, how much of the performance was due to favourable currency movement.
To give you an idea of how important this is, and taking a period of more ‘normal’ growth as a guide, the best global equity fund over a three year period to the end of December 1999 had returned 288%. The average fund returned 150%, the worst 52%. So even if you had invested with the average performing fund, you would have been a happy investor, but perhaps not so happy when you realised how much you could have made.
Fund choice at the asset allocation level is nowadays not a question of diversity across the globe, because so many of the large markets are still highly correlated. It is more about using the increasing mobility of capital and the visibility of opportunities in new markets (e.g. China) that is the key to making money. It is akin to stock picking at a market level.
On a global level, it is the ability to see markets that are in a positive cycle and finding the manager to exploit the opportunity.
I believe that this decade will be characterised by the hard knocks taken by investors who remain faithful to the idea of investing in major equity markets. In the same way that the Japanese Nikkei index took seven years to fall from 40,000 to 20,000, with regular false starts along the way. A solution to this equity trap is to free up your investments to focus on those areas that will make you money going forward.
Copyright 2003 Richard Newell