While markets tumble and issues such as the split-cap debacles, life company solvency margins, etc, dominate the financial pages, the old chestnut of past performance has been in the news.
The industry believes past performance matters but the FSA needs some convincing. When looking at the FSA comparative tables, I am reminded of the saying that “it is better to travel hopefully than to arrive”. An alphabetical list of funds differentiated by charges is not the long-term answer for the investing public.
To be fair, they do state that “you should never buy a product just based on what you see in the tables” and they refer to the possibility of getting “advice”.
There are more parameters than cost to consider and the debate has taken a further twist following the publication of the Charles River Associates report commissioned by the IMA.
This report analysed the performance of 942 funds across four sectors over the past 21 years, concluding “selecting a fund with top quartile past performance gave a better than 25 per cent chance of future top quartile performance”.
The cynics could argue that the figures are not totally convincing given that if we take the UK All Companies Sector, while 38 per cent of funds in the top quartile were still there a year later, 62 per cent were not.
The report concludes that “past performance information is a beneficial part of the investment decision-making process”.
There must be some common ground that can pave the way for an IMA/FSA joint venture to consider these issues.
I firmly believe that past performance data needs to be considered but it cannot be used in isolation. The industry does itself no favours sucking in waves of investors to a technology fund on the back of stellar 12-month performance numbers.
I applaud the moves to tidy up industry advertising ensuring statistics are quoted over standardised periods. The game of musical chairs occurring among fund managers is not helping – and there is an argument to track managers and not funds.
So what then should we be looking for when selecting a fund? First, past performance has to be considered although it is difficult to pinpoint regular performance consistency. Regulators and falling markets will drive the concept of risk as the main parameter to consider.
There are now some very helpful sources of information analysing risk-adjusted returns and advisers who focus on performance records in the context of considering the fund's risk and charges will be the winners. Any fund management changes are a vital factor and we need to assess whether or not the fund is run very much by an individual or on a team basis.
Style has to be considered given that Neil Woodford at Invesco Perpetual, for example, was being written off in some quarters when his performance numbers slipped in the technology boom. We saw the growth-focussed managers become temporarily kings of the castle.
Fund size is another factor, illustrated by Invesco European Growth and its spectacular fall from grace. In summary, there are a host of factors involved in the choice of a unit trust or Oeic. The job of an IFA is not getting any easier and faced with these onerous fund management selection issues, it is not surprising that multi-manager approaches to the problem are gaining momentum.
The past performance debate is central to the need for IFAs to demonstrate to the client a process-driven approach when choosing funds. IFAs by adding value should prosper and not be “passed performers”.
Michael Owen is joint managing director at PlanInvest