Just days away from the start of the festive season, I was sorely tempted to splash with an exclusive – yes kids, a chat with Mr Santa Claus about his personal investment portfolio.
After tracking him down to a non-descript industrial unit next to Westfield shopping centre, I interviewed the great man about his preference for different asset classes (toy manufacturers bullish, bearish nuclear power) and his take on the likely duration of Operation Twist (two more years until the bottom falls out of the bond market – smart man, Claus).
A public elf warning
But the grand shaggy dog of winter fun also admitted he did not have much time to constantly monitor his massive investment portfolio – he left that to a bunch of elves in the Swansea-based back office who had in turn employed a very smart London wealth shop.
Yet Claus was refreshingly honest about the investment challenges he faces: “Picking kids’ Christmas presents is very tough David, but I think I have it worked out now,” noted Santa. “Why not use someone who is also good at picking great investment fund managers and leave me to do what I am good at – delivering 86 billion presents in just a few hours.”
I later discovered not all the elves agreed with this assessment, and a particularly bumptious one piped up after the interview that having a strategy of relying on fund pickers was no better than trusting in luck.
So – like a dog to a bone – I am drawn back to that hoary old debate about what kind of fund manager to bet on. This ancient and impossible-to-resolve tussle is between the passive awkward squad who believe Santa is a mug, and the active brigade who think the bumptious little elf was speaking cobblers.
Passive types can point to any number of studies that suggest active fund management is a dud. One of the most definitive sources of data is S&P’s Indices versus Active Funds Scorecard of US funds data, which is a vast treasure trove of information going back many years. The latest half-yearly report makes damning reading. The data suggests nearly all actively managed US equity mutual funds underperformed their benchmarks in the 12 months ended 30 June this year – in fact, the report suggests 90% of all US equity funds failed to beat their benchmarks in the rolling 12 months prior to this date.
But the active brigade are not about to take this tirade of statistical abuse lying down. A recent report called The State of the Universe (2012) from Simon Evan-Cook, senior investment manager in Premier’s multi-asset funds business, carefully attempts to pick holes in some of the passive onslaught. Simon’s key argument is these big data trawls by the passive brigade usually look at the entire universe of funds… which is flawed. He reminds us most investors do not actually invest in the vast number of dud funds. Better, Simon says, to use weighted averages that follow actual fund flows. Once one parses the data using this technique, we end up with a more nuanced conclusion, which is that many investors do indeed beat the ‘market’ using active managers.
To test this, Simon looked at 12 asset classes and, using this weighted approach, he discovered successful managers in spaces like AsiaPac, EM, Japan and UK Smaller companies patently added value.
It is fascinating stuff, although my own reading of that data is somewhat different – in the other eight major asset categories, Simon’s data suggests most successful active fund managers failed consistently to add value, and that includes most of the sectors (the UK and the US) that dominate investor portfolios.
Which brings me neatly to my parting Christmas gift back to Santa Claus – a thank you for all his sterling work for kiddies around the world, in the shape of a shiny new book called The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by fund manager Michael J Mauboussin.
Simon at Premier is surely right when he suggests the key to picking a successful fund involves a detailed analytical process that looks at how the fund is run, not just some contested returns data. Mauboussin concurs, and suggests a three-part process – a real focus on how a manager puts together a portfolio, how they respond to emotional extremes in the market, and the way in which the fund is structured to make sure the investor wins out. But the key revelation here is these safeguards merely tilt the odds in our favour. Investment is still very much a crap shoot in which those wretched, damnable odds are constantly stacking against us. The best a manager can do is act like an ace poker player and make lots of successful bets, along the way increasing one’s odds of success from, say, 50% to 57%.
So, as an ever larger part of the advisory space spend their Christmas break hoping to find that perfect DFM who can do all the hard investment work for them, I would simply remind them the elf was right. It is a numbers game and the odds are still stacked against fund pickers. Merry Christmas!
David Stevenson is a Financial Times columnist, editor at Portfolio Review and consultant. Follow him on Twitter @advinvestor
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