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Is your investment fund a dog? Thumbnail

Is your investment fund a dog?


If "active" and "passive" management styles are defined in sensible ways, it must be the case that

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.

William F Sharpe, The Arithmetic of Active Management


Introduction


We are frequently asked to comment on a client's existing investments only to discover that they hold an absolute dogs-dinner of investment funds.

The following is by no means a comprehensive study but simply a list of some of the more common offenders.

The evidence from numerous academic studies overwhelmingly supports the view that trying to consistently beat the market is exceptionally difficult and, typically, highly concentrated and thematic funds don't live up to their marketing claims.

We can see evidence for the general point Bill Sharpe is making by looking at say the Zurich 5*5 range of funds over the last 15 years compared to the MSCI All Country World Index


Since these strategies are more concentrated than the broad market index, they tend to be more volatile (to the right on the x axis)

Even allowing for the fact that it isn't possible to invest directly in an index the average difference in annualised performance is 1.13%pa, more than enough to cover a passive index strategy.

Even when we directly assign a more relevant index for example the US Stockmarket to compare the Zurich 5*5 Americas fund we see a similar result over long periods of time

 Telling an investor that you can't beat the market is like telling a 6-year-old that Santa Claus doesn't exist

Burton Malkiel, Author A random walk down wall street

To provide a "market" benchmark for comparison purposes Global Wealth created a range of "unit-linked" portfolios of low-cost passive index strategies so that comparisons can be made on a like for like basis. Note that these are static "buy and hold" portfolios designed to provide a simple solution within an Irish Unit-linked contract. 

Please note that if a fund is not included on this page it is a not an endorsement to purchase, equally if a fund appears on a list it should not be read as a recommendation to sell it as further analysis would be required for a specific recommendation.

Please use the link below to book a time to review a particular fund in more detail.

Please use this link to book an analysis of a particular fund


Note that we have mainly chosen to look back over a 5 year period in order to catch persistent under performers. However, note that many funds are quietly closed down and removed from our database so there is considerable "survivor bias" even among this small sample of dogs.


How to read the charts


The "y" axis is annualised performance over the period under review (typically 4 or 5 years)

The "x" axis is annualised volatility (a short-hand measure of relative risk)

Therefore in the chart below the two points (D&J highlighted in the red box) have very similar realised volatility over the period


But we can see that the difference in annual performance is 8.2%pa over the 4 years ending September 2020.


To put this into perspective for a €10,000 Euro investment the difference in value after 4 years would be €3,705 more in Cautious Model compared to the AIMS Target Income. 

Significantly, these are both options available via this Investment Provider and this therefore really does represent and exact like for like comparison.

Presenting the data as a more familiar line chart looks like this 


However, further analysis would indicate that the fund distributes income and therefore additional analysis is required to establish the "total return" of the fund (income not shown plus capital value illustrated)

This clearly illustrates the importance of digging into the data, testing out of sample periods and reviewing the fund literature before reaching any conclusions.

However, even with the income added on a total return basis this strategy is disappointing as we would have expected from a complex strategy like this and this is entirely consistent with our analysis of the once popular GARS fund which can be found here

The purpose of the following analysis is therefore to suggest funds which may warrant further consideration. 

 

Aviva

The following is not a comprehensive analysis and is for educational and information purposes only.

Past performance is no guarantee of future performance

The Aviva multi-asset funds have been generally weaker than competitors in recent years

We would have particular concerns around the following funds

  • AIMS Target Income
  • AIMS Target Return
  • Emerging Markets Income
  • Multi-asset dynamic


Davy Global Portfolio Strategies (GPS)


The following is not a comprehensive analysis and is for educational and information purposes only.

Past performance is no guarantee of future performance

The Davy Global Portfolio Strategies (GPS) have consistently under performed a simple low-cost passive investment strategy in recent years with our Cautious stategy offering better risk/return characteristics than all three GPS models


Davy Foundation Funds (via Brokers)


The following is not a comprehensive analysis and is for educational and information purposes only.

Past performance is no guarantee of future performance. Only 4 years data currently available

The Davy Foundation Funds are made available to Brokers using the Davy Select Fund Supermarket as "packaged solution" 

Although we only have 4 years of data, these strategies to do not appear to added any value over and above a simple low-cost buy and hold passive investment approach.


Dimensional World Allocation


The following is not a comprehensive analysis and is for educational and information purposes only.

Past performance is no guarantee of future performance. Only 4 years data currently available

When we first introduced Dimensional Fund Advisers to Ireland some 12 years ago, financial advisers had to construct their own portfolios from available funds.

Some brokers complained that this was too difficult and Dimensional therefore made available to Brokers a "packaged solution" in the form of the World Allocation Fund of Funds 

Although we only have 4 years of data, these strategies to do not appear to add any value over and above our Smart-beta portfolios of Vanguard, Dimensional and other leading fund manager funds. Clearly in a non-taxable account such as a pension or ARF,  a whole of market, best of breed approach is better than having everything with just one fund manager.


Friends First

The following is not a comprehensive analysis and is for educational and information purposes only.

Although past performance is no guarantee of future performance we would have some particular concerns with 

  • Insight Currency Fund
  • Commodity optimum yield
  • KBI Global High Yield
  • KBI Euroland High Yield
  • Active Irish Equity
  • Magnet absolute




Irish Life

The following is not a comprehensive analysis and is for educational and information purposes only.

Although past performance is no guarantee of future performance we would have some particular concerns with 

  • Kleinwort Benson Managed
  • Setanta Global Focus
  • Setanta Global Equity
  • Setanta Income Opportunities
  • Setanta Managed
  • Setanta Equity Dividend
  • Biotech QLD
  • Global Access Equity
  • Progressive Managed


New Ireland


The following is not a comprehensive analysis and is for educational and information purposes only.

Although past performance is no guarantee of future performance we would have some particular concerns with 

  • Elements
  • BNY Absolute Return Bond
  • Evergreen
  • KBI Pension Managed
  • Equity Pension
  • Euroland Equity

Standard Life

The following is not a comprehensive analysis and is for educational and information purposes only.

Although past performance is no guarantee of future performance we would have some particular concerns with 

  • Global Absolute Return Strategies (GARS)
  • Absolute return global bond strategies
  • Property
  • Enhanced Diversification growth
  • My Folio Active
  • Global Equity


Zurich


The following is not a comprehensive analysis and is for educational and information purposes only.

Although past performance is no guarantee of future performance we would have some particular concerns with 

  • Eurozone Property
  • Dividend Growth
  • Irish Equity
  • Earth resources
  • 5*5 Europe
  • Diversified assets
  • Invesco Global Targeted return
  • JP Morgan Income Opportunity


Portfolio back-testing disclosure

 

Information and opinions presented in this material have been obtained or derived from sources believed to be reliable, but we don't make any warranties, undertakings or representations as to the accuracy, quality, suitability, reliability or completeness of the content of this material. Any liability (including without limitation that for negligence or for any damages of any kind) to the maximum extent permitted by the law arising from the use of or omission to use the content of this material is excluded. Fund data provided by FE for the purposes of portfolio evaluation and does not constitute investment advice and is used at your own risk. The back-tested portfolio returns are illustrated net of representative underlying fund management charges but before advisory fees.

The performance information presented represents back-tested performance based on combined index data and live mutual fund results using the strategy of buying holding and globally diversified portfolios of largely passive index tracking funds. Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to indicate historical performance had the model portfolios been available over the relevant period.

Our investment philosophy is based on the principles of Modern Portfolio Theory. Our model portfolios are designed to provide substantial global diversification in order to reduce investment concentration and the resulting increased risk caused by the volatility of individual companies, indexes, or asset classes. Client portfolios are monitored and where necessary rebalanced, taking into account risk exposure, transaction costs, and tax issues to maintain target asset allocations. Back-tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower than that of the model portfolios. Back-tested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser's decision-making process if the adviser were actually managing client money. Back-tested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time to obtain more favourable performance results. Not all clients follow our recommendations and depending on unique and changing client and market situations we may customize the construction and implementation of an actual portfolio for particular clients, including the use of mutual funds, tax-mitigation techniques and rebalancing frequency and precision. As with any investment strategy, there is potential for profit as well as the possibility of loss. We do not guarantee any minimum level of investment performance or the success of any model portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable. Fermat Point Ltd trading as Global Wealth is regulated by the Central Bank of Ireland