Sometime in the 1960s, or possibly in the 1970s, Mexico set about expanding its motorway capacity. As is so often the case, although the political capital was there the finances were not.
With an election pending, an expedient solution was required. A bright young spark at the Ministry of Transport suggested re-marking the two-lane highways as three lanes.
Once implemented, the 50 per cent increase in road capacity had an immediate impact but, unfortunately, consequences for the accident rate were grave. Eventually common sense prevailed, the policy was rescinded and the roads were put back to their original state.
Nevertheless, the incumbent politician led his re-election campaign on the basis that the road network had been increased by a net 17 per cent. This had been achieved through increasing capacity by 50 per cent followed by a decrease of 33 per cent.
The tale is almost too wonderful to be anything but apocryphal, but it elegantly underscores the power of presentation and the art of spin.
We are all prone to be influenced in ways that we know we shouldn’t be. I would like to consider myself as discerning and objective, but I can think of several funds that, with hindsight, I really shouldn’t have gone near.
Looking back, I confess perhaps I was influenced by the charm and flattery of the fund manager, scarcely characteristics that would generally be considered important in engineering superior performance.
Of course, it is not only personalities that can sway fund buyers. Fund managers’ marketing departments spend countless hours plotting how best to display their wares. Current regulations prohibit the more flagrant practices, particularly in relation to performance data, but plenty of latitude remains that enables the run-of-the-mill to be presented as dazzlingly attractive.
Experienced fund selectors know that what is not trumpeted in the pitch book can often be covered in warts. It is up to them to discover what is hidden away.
The judicious presentation of data acts as a potent sales tool, even where the favourable data has been derived through happenstance.
For instance, funds launched 10 years ago as the bull market got under way may be perceived very differently from those born into the teeth of a bear market 11 years ago. Indeed, all charts can be incredibly sensitive to the starting point.
There are a number of approaches to overcome these problems. Reviewing performance records over several discrete periods is one method, but still has its limitations. It is nonsense to suggest that a calendar year performance has more significance than any other 12-month period. Yet funds’ annual rankings are widely advertised.
Square Mile’s preferred solution is to consider funds using rolling data. While not perfect, this tends to provide a better indication of what the fund has achieved and what the performance has been like for the average investor. As such, rolling charts can be far more instructive as to whether a fund is meeting its performance objectives.
Fund purchasers, of course, can be their own worst enemies when it comes to interpretation. A fund that has grown from £100 to £160 has not done 10 per cent better than an alternative that grew to £150. Yet it is easy to leap to this conclusion.
As with my Mexican motorway example, sloppy thinking can all too easily slip into any analysis. Note that £160 is 6.7 per cent greater than £150.
It’s one thing for a fund to be presented with eyeliner and lipstick on; it’s another for the fund buyer to start applying the blusher.
Good fund analysis is all about discovering what remains once the marketing gloss has been removed. Just make sure that your own biases don’t distort the assessment.
Jason Broomer is head of investment at Square Mile Investment