Opinion: Consumer article worse than useless
Consumer has put out its second article criticising managed funds - this time international share funds. FundSource executive chairman David van Schaardenburg gives his opinion on the article.
Thursday, July 1st 2004, 7:50AM
Its study of the performance of 25 international share funds shows that over a decade five funds couldn't keep pace with inflation, six outperformed what a customer would have got if they had put their money in a term deposit at the bank.
In this Opinion piece the head of the research company that provides Consumer with data gives his view on the article. Read on.
The latest Consumer magazine continues the review of historical performances [last 10 years] of managed funds. Pick an unhappy story, make some inaccurate comparatives and suddenly you have a revelation.
For investors this ‘analysis’ is worse than useless – it is misleading. The survey is merely an naïve extrapolation of past trends.
As with the Consumer’s prior similar articles on this topic we find little of news or usefulness in that the historical returns represent past events while logical investors will be more interested in the future.
The article provides the ‘insight’ that some equity funds beat the market, some were around market performances and some were below. Hmmm. The market’s returns – being the average, will naturally fall between the better and weaker performers.
And that is why research groups exist to point the better informed investor towards those managers who are likely to perform better than the peers and away from those who are less so. Just like any other industry there are the superior and inferior product offerings – the average doesn’t matter because nobody actually buys it.
We are of course very pleased that the top performer over the 10 year time frame has been the Fundsource International equity fund of the year for the last two years. And unlike Consumer, we did recommend this fund for investment back in 1994 – a bit more useful than Consumer telling us it’s a good fund after the event.
Which goes to the heart of the issue. Consumer is trying to tell it’s readers what happened yesterday is very important for tomorrow.
Maybe when analysing toasters but unfortunately capital markets have a habit of doing the unexpected and sometimes the opposite of the past. That’s why Fundsource’s research process is forward NOT backward looking.
Developing a forward looking perspective on fund performance unfortunately is not as simple as merely recording past results and fund fees. Formulas for success in funds management endeavours not only take time and expertise to understand but also to find within the diversity of groups Fundsource researches. For the past 20 years Fundsource has had a research team dedicated to such work.
Consumer also points out that over the past 10 years equity investing has done worse than lower risk cash investing – therefore stay in cash in the future. Longer term and more comprehensive research would tell you that such a strategy has a very low likelihood of success.
Not only have equities outperformed cash in over 90% of 10 year time frames in the last 100 years but this probability improves after equities have done poorly. As such, I’m putting my money on equities beating cash in the next 10 years.
In entering the financial advice game Consumer implies that they are providing the investing public with new and meaningful research. As a full-time fund researcher for the last 12 years, I understandably dispute this. Any professional independent financial adviser should have access to research which dwarves Consumer’s efforts.
The key for investors is access to that research. Amongst the questions investors should ask a financial adviser – Do you get 3rd party investment research? If not – then find one who does.
However, if people choose to invest DIY or through a tied salesman, as clearly many do, they can anticipate outcomes possibly below the best available – but that’s the consumer’s choice and with that goes the responsibility for making possibly a suboptimal decision.
All the survey tells Fundsource, is that many investors have made poorly informed decisions. This has led to investing in funds that we would not invest in. Time those investors took responsibility to think smarter before committing their hard earned savings.
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