Fundology by John Chatfeild-Roberts

Author:John Chatfeild-Roberts
Language: eng
Format: epub
Publisher: Harriman House

Other interpretation problems

To summarise therefore, using past performance can be a way to investigate whether a fund manager possesses real skill. Arriving at a verdict is not simple, however. It requires a reasonably sophisticated knowledge and understanding of investments, a considerable database of price performance, and knowledge of the industry. Interestingly, trawling the numbers over a long period of time shows that bad performance has a greater likelihood of being repeated in the future than good performance.

There are a number of other potential problems. Firstly, there is a major one for those of you who are reading this book to try and determine whether your segregated portfolio manager (whether he is managing an individual account, a charity or a firm’s pension fund) is any good. The performance record of your fund is unlikely to be available in sufficient enough detail to draw any conclusions. Secondly, many investors may not be aware which individual manages their fund, and for how long they have been at their post. It can be discovered reasonably easily, but does require effort on your part.

Research conducted by my team’s competitors at Credit Suisse shows the average tenure of a fund manager on a fund is roughly three years. Research into the performance record, therefore, may not have any relevance at all. Thirdly, but more rarely, there can be managers who create good performance by doing one thing, without actually saying as such to the outside world, then going on to manage money in a completely different manner. So, research into their track record may be genuinely misleading.

Not all he appeared to be

One fund manager I know made their name during the dotcom boom with staggeringly good performance. This manager was described in the marketing literature as being a ‘value investor’. A couple of years later, it was confirmed to me that the amazing performance of the fund during those heady times had not in fact come from ordinary value investing – very much the opposite. Traditionally value investors are meant to be patient, ready to wait months or years for their favoured shares to come back into favour. Not so this one. “We used to flip (sell straight away) new issues like they were going out of fashion,” I was told. “If we didn’t think they would go to at least a 20% premium, we didn’t bother with them. They weren’t worth the effort.”

It may not have been fundamental investment as most people would define it, but it certainly made his investors a lot of money. Unlike many, this manager was sensible enough to realise what was going on and that the crazy market conditions of 1999-2000 could not persist. From February 2000 onwards he used the money that new investors had put in his fund to buy genuine value stocks, such as tobacco companies, which had been hammered during the bubble, but which then started rising inexorably. The moral is that you do need to look behind the figures. Analysis of the past performance of his fund might lead someone who didn’t know the facts to draw misleading conclusions.

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