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Past re­turns are of less im­por­tance

Weekend Argus (Saturday Edition) - - GOODPOSTER -

Analysing past per­for­mance to de­ter­mine which fund man­ager you should use is use­ful only if you can dis­tin­guish be­tween per­for­mance that was the re­sult of an in­vest­ment team’s skill and that which re­sulted from luck, David O’Leary, head of fund re­search in South Africa at Morn­ingstar, says.

It is dif­fi­cult to call as­set man­agers that have been per­form­ing well for 20 or 30 years “lucky”, O’Leary says.

But most man­agers have not had the same in­vest­ment pro­fes­sion­als for 20 or 30 years, and typ­i­cally the in­di­vid­ual who man­ages a fund has changed in the past three or four years, he says. The time it will take to do re­search into past per­for­mance may make the ex­er­cise less worth your while than look­ing for the other char­ac­ter­is­tics that are the hall­marks of a good fund man­ager.

O’Leary says that good per­for­mance does not al­ways cre­ate good ex­pe­ri­ences for in­vestors. You should not un­der­es­ti­mate how volatil­ity can elicit the wrong be­hav­iour from in­vestors, he says.

It is hu­man na­ture to re­spond with good feel­ings to a fund that is per­form­ing well and to sell one that is do­ing badly, but the in­vest­ment pro­cesses and mar­ket cy­cles of most funds take them through up and down cy­cles.

When in­vestors dis­in­vest dur­ing a fund’s down cy­cles and rein­vest when the fund is again pro­duc­ing good re­turns, they ruin their chances of earn­ing the re­turns the fund man­ager achieves for the fund. The in­vestors’ re­turns will be dif­fer­ent to the timeweighted re­turns mea­sured for the fund over a par­tic­u­lar pe­riod.

O’Leary says it is not in­con­ceiv­able for a hypothetical fund in the United States to have re­turned 15.05 per­cent a year be­tween 1997 and 2006, whereas the in­vestors in the fund re­ceived an av­er­age neg­a­tive re­turn of –1.46 per­cent. This is be­cause in­vestors typ­i­cally in­vested when the mar­ket peaked in 1999 and dis­in­vested through­out the sub­se­quent mar­ket fall and the mar­ket re­cov­ery from 2003.

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