Finweek English Edition - - COMPANIES & INVESTMENTS -

Aver­age age 3 year re­turn = 15% pa

CPI +3%

CPI and have noth­ing to do with the risks in­her­ent in the in­vest­ment strat­egy – it tells us noth­ing about how risky the port­fo­lio is.

The cor­rect def­i­ni­tion of skill never asks if you out­per­formed your bench­mark. Rather, it asks if you out­per­formed the ag­gre­gate risks you took. This is be­cause it is easy to po­ten­tially out­per­form any bench­mark by tak­ing on ad­di­tional risk rel­a­tive to the bench­mark.

Fund man­agers can only out­per­form their ag­gre­gate port­fo­lio risks by ei­ther mar­ket tim­ing the dif­fer­ent risks (e.g. as­set a l l oca­tion) or t hrough stock­pick­ing or ‘se­lec­tion’ skill within each risk cat­e­gory or as­set class.

It has been proven that it is very sim­ple to out­per­form a com­mon ‘ bench­mark’ like CPI+3%, but the risks taken to do so may not be ap­pro­pri­ate. The graph be­low plots the rolling 3-year re­turns of a con­ser­va­tive pas­sive port­fo­lio of 70% in­vested in the All Bond In­dex and 30% in the All Share In­dex over the last 30 years. The aver­age re­turn of 15%

70% ALBI +30% ALSI (rolling 36-month an­nu­alised re­turns) per an­num would com­fort­ably have beaten a CPI+3% ret urn tar­get, but t he “price” of this re­turn clearly came at a level of risk that is un­ac­cept­able for a con­ser­va­tive port­fo­lio.

Be­ware the dif­fer­ent qual­i­ties of risk

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