The saying goes that the more you practise the luckier you seem to get – but does this apply to investment fund managers?
Renowned psychologist Daniel Kahneman reckons success is a combination of talent and luck.
But investors want to rely on safe hands and skill rather than luck when handing over their cash.
Billionaire investor Warren Buffet likens choosing an investment manager to flipping a coin.
If you had a 1,000 managers and flipped three times each, he reasons, the odds are 250 would have a perfect record, but maths says 31 gained their status just by luck.
Eventually, he says, if the managers play the game long enough, none would show profits over a long time as their records would even out according to the law of averages.
More luck than skill
Fund managers would like investors to believe their results are more skill than luck, but the truth is they cannot predict the future even though they have gut instincts, millions of terabytes of economic data and the laws of statistics to pick a winner.
Standard & Poor’s, the US credit agency eloquently pointed out that fact after conducting a five year review of the American fund market.
They decided that 25% of funds outperformed the market, 25% underperformed, 25% bombed and 25% shut up shop.
So the odds of choosing a star fund manager are one in four and, says Standard & Poor’s, if you back the wrong guy, you have to have money riding on at least two star performers to even out your losses on the others.
Investor behaviour
With US markets and funds booming over the past three years, top results don’t make a fund manager a star because most people can make money at the top of the cycle. To see who really makes the cut means waiting to see who bags a profit when economic times are tougher.
Andrew Wilson, head of investment with financial firm AXA Wealth also argues investor behaviour should be considered when assessing fund performance.
“How the funds performed depends on when investors buy in as much on how the manager looks after their cash,” he said. “The best US fund for the 10 years to 2009 was CGM Focus Fund. The fund returned 18% a year but the average investor posted an 11% annual loss because they bought and sold at the wrong times.”
So maybe who the fund manager is doesn’t matter – maybe investment growth is down to timing when to twist and when to stick.
