An independent professional's take on the latest news and trends in global financial markets

Consistency In fund performance

According to the multi-manager team at Thames River Capital, only 16 out of the 1188 funds in the 12 main UK sectors have delivered top quartile returns in all three of the last three fiscal years (March to March). Only 102 of the funds, or less than 10% of the total, managed to achieve even above average returns in all three years. In many sectors, including all the bond funds, not one fund managed to be top quartile in each of the three years. Shock horror? No, this lack of consistency should come as no surprise, since most funds tend to follow a consistent style and thus their relative performance invariably changes when the market itself changes direction, as it notably did in March 2009.

That explains why there was much higher consistency in fund performance ahead of the big market turning points in 2003 and 2007, but not in the three year periods which straddled the turning points. Another way of saying the same thing is that very few funds are set up to make big calls on market direction (and absolute return funds, which are, tend not to do the job very well). The few equity fund managers who have performed in both rising and falling markets, Thames River Capital’s Gary Potter tells the Financial Times, “tend to have a very, clear tried and tested approach to how they manage money and a lot of experience”.

The importance of method and experience - witness also the quotes from Keynes in my previous post – is a lesson which is certainly borne out by my research over more than 20 years of analysing and picking funds. Note also that the seven funds in the UK All-Companies sector which did outperform in all three years all lost between 20% and 30% of their investors’ money during the 12 months from 31 March 2008 to 31 March 2009. The fact that this earned them top quartile performance underlines how poorly most equity funds inevitably fared during the fallout from the global financial crisis (their overall drawdown, from start to finish of the crisis, was even greater). The seven funds involved include three (MFM Slater Growth, CF Lindsell Train UK Equity, Cazenove UK Opportunities) which I either own or have on my watchlist.

Written by Jonathan Davis

May 28, 2011 at 4:54 PM