Beware Active Fund Managers Misleading Performance Data
As we approach the tax deadline for 2016 next month, this time of year is traditionally known as “pensions season” in our profession. Most self-employed people are getting ready to file their tax return for last year and make a pension contribution to reduce their tax bill.
Every year during pensions season we are inundated with marketing material from various fund managers. A lot of the material we receive relates to their respective funds’ performance and why it’s vital to have an Active Fund Manager investing your pension each year in order to beat the market.
A common theme amongst the fund manager data that we receive is that they all seem to be beating the market. This of course is in direct conflict with our own research, which shows that over the long term, when fees are taken into account, less than 5% of active fund managers actually beat the market.
This either suggests that Fund Managers, who are sending us information are somehow outperforming all the other fund managers across the globe or that perhaps the information they are sending out is not telling the full story.
Here are a number of things you need to watch out for when looking at active fund manager performance data:
- Returns Quoted Gross of fees
- Cherry Picking of dates
- Cherry Picking of Funds
Firstly, it is no longer a secret that Active Fund Managers charge higher fees than index tracking funds. They also incur higher internal costs as they trade more often than Passive Fund Managers. Annual ongoing costs can be circa 2% in some of the funds we have researched. Quoting returns gross of charges is irrelevant as all the investor cares about is what they get back into their hands. In the words of Jack Bogle “over the long term, the miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”
The second problem is an old bug bear of ours, Fund Manager’s choosing data from particular time frames that suits them. We have seen a number of managers give incomplete performance data, only looking at the last 5 or 10 years and often leaving out major markets events such as the “dot com bubble” or the financial crisis. All too often Active Fund managers cherry pick the dates that make their fund look like it has beaten the market.
The third problem is the cherry picking of particular funds. Active managers can manage a range of different funds at any one time and over the course of a 15-year period they could have opened and closed a lot of different funds. Based on luck alone we would expect that at least some of their funds would outperform the market so picking your best fund over a given period of time and comparing it to the market is by no means evidence that you can consistently outperform.
We never argue that there is no skill in active management or that active managers cannot outperform the market some of the time. However, over the long term our research shows that less than 5% consistently outperform the market. This is less than you would expect based on luck alone.
So how can you sift through all the marketing material and performance data thrown at you by fund managers and brokers? Well here are three simple questions you can ask them:
- What was the performance of the fund NET of charges compared to the market?
- How has the fund performed since inception to today’s date?
- How many of all the funds you managed over this period beat the market?
We remain dubious that you will get all of these answers and if you do, we expect you will come to the same conclusions as the team at Metis Ireland.
Cian Callaghan CFP QFA RPA
Head of Operations & Financial Planning
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts