Sound Financial Group Blog

More column inches in the press last weekend in respect of the worst performing investment funds, or ‘dogs’ as they affectionately known. But what does this mean for investors who hold such funds?

The release of the latest ‘spot the dog’ report from Bestinvest has given the financial press another good headline to worry investors with. The report highlights fund managers who have underperformed their benchmarks by at least 10% in the last three years and have failed to beat the benchmark in any of those three years. The number of funds in this category has increased by 74% since November 2010 and Bestinvest estimate that there is now around £23bn of investor’s money in such funds.
But should we be surprised at such statistics? Are these facts an inevitable consequence of the nature of the investment game? Research form Blackrock iShares suggest that the chance of fund managers outperforming their benchmark three years in a row is just 4% or 25-1 in gambling parlance.
Some fund managers will of course outperform their benchmarks and those in dog funds will naturally want to move their money and invest with these ‘successful’ managers. But a strong word of warning needs to be heeded as there is no statistical evidence that past performance persists. Those that do outperform will naturally attract a deluge of new money and this makes the fund manager’s job at reproducing outperformance much harder. And for those manager’s who do outperform the question will be (or rather it should be) is this down to skill or luck? In John C Bogle’s excellent book The Little Book of Common Sense Investing, it states that to statistically prove that a money manager is skillful and not lucky would take between 20 and 800 years! Of course it’s highly unlikely that in today’s fluid world of money management that any manager will be around for anywhere near 20 years.
The problem for many active fund managers is simply the costs that they carry which makes outperformance difficult in the extreme and for this reason we only recommend that investors use passive funds whereby costs are much cheaper and you can get very close to the return offered by the index you are tracking, without worrying if the manager you are paying is performing or not.
As the saying goes – in investment management, you get what you don’t pay for.
If you wish to discuss your own investment strategy or would just like a second opinion on your current investment arrangements, please contact us and take advantage of a no cost or obligation meeting.