You are always advised to approach equities as a long-term investment and yet the media are exceptionally quick to talk about timing the markets. Logic dictates that the longer your time horizon, the greater the risk you can take because time is risk’s biggest friend.
This view translates to individual funds as well as asset classes. Our research has proved that chopping and changing between funds that produce strong numbers for a short time is costly and a burden on time, effort and energy. You could also lose money through tax or miss out on dividend payments.
At F&C, we look for consistent funds which offer reliable but boring returns using our Traffic Light Analysis System. This helps us identify consistency across all funds, not just on a performance basis but also taking into account volatility, information ratio, correlation, alpha and maximum loss.
The system gives a green light to funds that produce the most consistently strong numbers across all six filters. The most consistently weak get a red light and those with varying consistency an amber light. The funds with the most consistent returns are often among the best long-term performers. Looking at the 229 funds in the UK all companies sector, only 15 have beaten the sector average each year for the past five discreet years. Had you invested in all 15 funds, your average return would put you in the top decile. The same is true of Europe ex-UK, North America and even the UK corporate bond sectors, to name but a few. Consistency is hard to find but it pays.
The reason why is simple. If you have the number-one fund this year, the chances that it will be number one next year, not to mention over the next four years, are relatively slim. To be number one, you are likely to have had to take on distinct risks which may not pay off favourably during another period.
In the search for consistency of return and risk control that could be said to border on the boring, we do not have to restrict ourselves to boring funds. We spend a lot of time on portfolio construction to ensure we understand the interaction between different funds within each portfolio in terms of risk levels, investment process and investment universe. We are long-term investors hunting for funds that provide consistency over the longer term in terms of performance and risk control, not only in their own right but in the context of the portfolio. Short-term noise is an all too easy distraction to long-term goals.
Tom Caddick is a fund manager within F&C’s multi-manager team.