BY ROLAND ROUSSEAU, OF BARCLAYS AFRICA GROUP
Average age 3 year return = 15% pa
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