Fund Managers
09/07/2005
I had to select fund managers recently to manage the funds of a think tank of which I am a trustee - it was a substantial sum too. So we received pitches from some of the biggest and best fund managers.
They're supposedly the best equipped to manage your funds. Billions of dollars are entrusted to them, and they have global resources at their disposal.
So should you assign some of your money to fund managers? After all, there's been a recent proliferation of fund supermarkets.
The lawsuit by Unilever's Pension Fund against Merrill Lynch a couple of years ago alleging fund manager negligence in underperformance was one worry. If Unilever can be so unhappy with their fund manager, what hope does an online trader have, even with novel online tools, of picking a good fund manager?
Little hope, according to ample evidence. "The deeper one delves, the worse things look for actively managed funds
99% of fund managers demonstrate no evidence of skill whatsoever." concludes William Bernstein in his study of the fund industry.*
Investment legend Peter Lynch in Beat the Street** confirms, "all the time and effort people devote to picking the right fund, the hot hand, the great manager have, in most cases, led to no advantage".
And Warren Buffett in his 1996 letter to his Berkshire Hathaway shareholder advocates a passive index tracker over fund managers: "
the best way to own stocks is through an index fund..."
But the most damning evidence against trying to pick a fund manager is their own performance.
Only 9 out of 355 funds analysed by Lipper and Vanguard beat their market benchmarks from 1970-1999. What about only picking the best performers using tables. Unfortunately, all the top 10 performing funds in any year drop from 1st place to nearly last place among all funds within in 2 to 4 years according to a 26 year study by DALBAR. The reverse, unfortunately, is not as certain.
Updated in 2001, the study found that from 1984-2000, the average stock fund investor earned returns of only 5.23% per year, while the S&P 500 returned 16.29%.
Yet despite this, 75% of mutual fund inflows follow last years "winners", according to fund researcher www.morningstar.com. And Lipper Europe (www.lipperweb.com) confidently claim that European fund assets will grow to over $10 trillion before 2010 from the current $3 trillion.
So what is to be done? If fund managers can't beat market benchmarks, then we could invest in index trackers and be assured of at least matching the benchmarks. If only it was that easy. Tracker funds can diverge from the index they're tracking by up to 30% according to a survey by Chartwell Investments.
And for Unilever and Merrill Lynch? With so much evidence about poor fund manager returns, little wonder that no pension fund has ever before tried to claim negligence against a fund manager for under-performance. After all, the fund managers could turn around and say, 'what did you expect?'
*The Intelligent Asset Allocator, William Bernstein, (McGraw-Hill 2001)
**Beat the Street, by Peter Lynch and John Rothchild (Simon & Schuster 1994)
Value-Growth
On my value growth criteria which are based on stocks meeting revenue and profit growth and good value based on criteria such as price earnings growth, the following names come up. Remember they are for a 6 month outlook: Lookers, Spectris, Ferraris, Comino, Rensburg Sheppards.
Remember I am targeting about 20-20% with the value growth criteria. Last year it produced 33% return. On my momentum value indicator I have Just Car Clinics, International Power, Charter, THB.
Crazy Small Stock
These are high risk volatile stocks which could move sharply higher or move sharply lower in my view, but will almost certainly not stand still. Names on the radar include: Goodwin, North Midland Construction, Pharmagene.
Also, if you would like a free multi-media CDROM on 'Investing Better', which covers spreadbetting, CFD trading and momentum indicators like the MACD, posted to you then drop me an email with your postal address to alpesh@tradermind.com.
Spreadbetters
Spreadbetters and futures traders often look at hard and soft commodities. Here's my quick take on the action for the week ahead:
- Oil: Sideways to down
- Copper: Sideways
- Gold: Sideways to higher
- £/$: Sideways
- Dow: Higher
- FTSE 100: Mixed to higher
- Soyabean Oil: Up
|