Financial Happenings Blog
Sunday, January 31 2010
A report published by Standard & Poors last month in the US looked at the issue of whether superior performance on the part of a fund manager persists. This is a pretty important topic because many investors of active managed funds tend to look at past performance as a guide to whether a particular fund or manager will do well into the future.
One piece of research evidence used to guild our investment approach for clients places doubt on the issue of fund manager performance continuing. The following is an extract from "Our Research Based Approach" brochure:
On Persistence in Mutual Fund Performance
The Journal of Finance
Mark M. Cahart
March 1997, Vol. LII, No. 1: 57-82
What the paper says: There is no evidence that choosing a managed fund that had outperformed in the past would provide above average returns into the future.
In the author's own words: "The results do not support the existence of skilled or informed mutual fund portfolio managers."
The research clearly showed that just because fund managers out performed in the past did not mean they would continue to do so.
Now some will say that this study was conducted more that 10 years ago and times have changed. So its good that Stadard & Poors produce their regularly updated analysis into the topic.
In their latest publication - Do Past Mutual Fund Winners Repeat? - The S & P Persistence Scorecard the researchers make the following observations:
- Very few funds manage to consistently repeat top-half or top-quartile performance. Over the five years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a top quartile anking over the same period.
- Screening out bottom quartile funds may be appropriate, however, since they have a very high probability of being merged or liquidated.
In layman's terms what they found was that just because a mutual fund (termed managed funds in Australia) out-performed previously does not mean it will continue to do so. However, if a mutual fund under-performs badly in past periods it may be worth avoiding this fund as there is a high likelihood the fund won't exist in the future.
These are results from the US but as we see time after time the experience here in Australia tends to reflect the same results.
In conclusion, if you feel like using actively managed funds is the way to go in building your investment portfolio (not the recommended action of this firm) then be very careful using past performance as the key selection determinant.
A better approach in my opinion is to focus on the key determinant of future return - asset allocation - and build a portfolio that minimises risk through broad diversification.
Friday, January 22 2010
In his latest Eureka Report article, Scott Francis looks at where the Australian share market index might get to in 2010 and beyond. Rather than make a forecast, Scott uses historical average returns to provide a guide. Some interesting calculations and a good guide as to what a prudent investor should be expecting.
Please click on the following link to be taken to the article - Peaking ahead.
Thursday, January 21 2010
In his first article for 2010, Scott Francis looks at the often mentioned "January Effect". He clearly shows that there is no predictive value to be gained from seeing what the market does in January. Please take a look at Scott's article for the details - The January effect .
Wednesday, January 20 2010
Scott Francis in his final Eureka Report article for 2010 reminds readers that history tells us that we tend to overreact to recent data. He looks specifically at research conducted by Malmendier & Nagel which came to the following conclusions:
Economic events, especially recent events, are more important than historical facts in influencing investment decisions.
Investors who have experienced high stockmarket returns are more likely to participate in the stockmarket and own a greater proportion of shares in their portfolio.
When actual returns are looked at, investors tend to destroy wealth by having too much of their assets in shares after good times, and too few after difficult periods. It's fair to say at the end of a shocking year, at the end of a worse-than-average decade, this evidence is likely to be reasonably relevant.
Scott concludes that we should not look at what has happened over the past year or even decade, rather we should stay in the market, thinking carefully about the asset classes you wish to expose your capital to, and about how you apportion your capital between asset classes.
Click on the link to be taken to Scott's article - Something you must know about 2010.
Monday, January 18 2010
Most of us will not have the good fortune of winning the lotto nor coming into a significant amount of money through an inheritance. The key to building wealth therefore will be about your ability to generate income, save a good part of that income and then invest those savings well.
Many of us put the cart before the horse by focusing on the investment stage of the process without realising that it is really the first two stages - generating income and saving - that will be the real determinants of our wealth in future years.
At the beginning of another year it is a great time to focus on the savings element of this equation to see whether you can wring out even more available funds from your take home pay / income.
"The Millionaire Next Door" written by Stanley & Danko in 1996 provide an interesting insight into the average millionaire in the US and how they have built their fortune. They found that frugality was the foundation for building wealth and provided the following evidence of this frugality:
- self-made millionaires spend significantly less for suits
- the majority did not buy expensive shoes
- the majority did not buy expensive watches
- do not drive new cars and spend the same as the average person on car acquisitions
The book also provides some practical advice they found in their study of successful millionaires:
- Operate on an annual household budget
- Know how much your family spends each year for food, clothing and shelter
- Have daily, weekly, monthly, annual and lifetime goals
- Spend time planning your financial future
This discussion leads me to an interesting article I read in Sunday's Courier Mail - Losing billions in loose change . the article quoted research that found "about $46 billion, or $2000 a person, was sitting in loose change jars, car consoles, piggy banks, shop tills, office floats and a corner of the purse and Ratecity said it was costing Australians as much as $2.5 billion in lost interest ... The average Australian could earn an extra $115 per year from interest if they deposited loose cash into a high-interest savings account"
It also found - "that Australians were losing $3.36 billion each year on comprehensive car insurance by not shopping around for a better deal."
So here are some practical examples of how we can all start to wring out some more savings this year - don't leave that spare change laying around and go back and check that you are getting a good deal with your car insurance.
There are many other strategies depending on your personal circumstances. Three good sources of ideas to get you started are:
- Simple Savings - www.simplesavings.com.au
- Cheapskates - www.cheapskates.com.au
- Choice - www.choice.com.au
I hope this provides some useful tips for getting your savings plan off to an even better start in 2010. Good luck and happing saving!
Sunday, January 17 2010
As this is my first entry for 2010, I would like to welcome you to the new year and hope that it is a peaceful and prosperous one for you.
For my first entry this year I have reflected on some simple yet profound reminders that we should all take with us through 2010. After a great Christmas and New Year season I am getting back into the swing of reading other media coverage. Over the weekend I came across an article on CNN Money - The 6 biggest investing mistakes - written by Burton Malkiel & Charles Ellis, both well known authors and scholars and co-authors of their latest book - "The Elements of Investing".
I am a firm believer that it is the mistakes that investors avoid rather than necessarily the good proactive decisions they make that will define the success or otherwise of their investment experience.
Malkiel & Ellis put forward these mistakes as the biggies:
2) Following the herd - either in exuberance or distress
3) Timing the market
4) Assuming more control than you have
5) Paying too much in fees
6) Trusting stockbrokers
These mistakes are very much at the core of this firm's investment philosophy. I know very well that I have little ability if any to predict the future for investment markets and have absolutely no control over this destiny. What I and all investors do have control over is keeping a portfolio well diversified in low cost structures and investments that will position portfolios as effectively as possible (depending on tolerance to volatility in investment markets).
If you can follow a similar approach and avoid the 6 big mistakes you should be well ahead of the herd in the long run.
Have a great year.