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One-year fund performance tells you nothing

A ten-year analysis of balanced funds shows the variability of returns.

Investors in multi-asset high-equity (or balanced) funds should, and generally are, putting their money away for the long term. Their investment horizons are anything from five to 40 years, or even more.

Yet there is still an obsession with how funds perform from year to year. Just looking at the flows into unit trusts shows quite clearly that there are many investors basing their fund choices on 12-month returns.

An analysis of the year-to-year performance of top-performing funds over the last ten years however shows how problematic this is.

The table below shows the ten funds that were top performers in the South African multi-asset high-equity category in each of the ten one-year periods starting from October 1 2007 and ending September 30 2017. Some might argue that this is an arbitrary time frame, but it’s really no more so than a calendar year. Markets don’t move according to the calendar.

The table illustrates the performance of these funds over each of these ten periods. The numbers in the boxes show their category ranking, and the colours depict in which quintile they fell. The lightest green is top quintile performance, and each shade darker is one quintile lower.

10-year performance of SA multi-asset high-equity funds

 

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Total number of funds

35

41

44

48

55

63

79

81

94

116

Dotport BCI Pudential FoF

1

3

35

20

32

39

62

55

68

69

Cadiz Balanced Fund

30

1

9

41

7

46

79

76

37

2

Coronation Balanced Plus Fund

8

11

1

15

25

3

19

51

32

35

Investec Opportunity Fund

2

20

23

1

24

48

57

15

18

64

Rezco Value Trend Fund

3

21

36

5

1

4

50

4

91

59

Momentum Best Blend Balanced FoF

23

30

33

34

12

1

17

30

21

47

Nedgroup Investments Balanced Fund

27

1

3

60

106

Autus BCI Balanced Fund

20

13

26

40

15

7

30

1

86

101

Allan Gray Balanced Fund

6

6

31

2

44

21

7

70

1

65

Investec Managed Fund

15

36

13

7

18

39

53

5

8

1

Source: Morningstar

The first observation is that no fund is consistently a top performer. There isn’t one that doesn’t appear in the fourth quintile at least once over this period, and there are only four that weren’t ever in the bottom quintile.

Investors need to expect this. Any fund, no matter how good, will go through times of underperformance.

On top of this, performance is highly variable from one year to the next. Nothing demonstrates this more starkly than the Autus BCI Balanced Fund, which went from being the top fund in 2015 to featuring in the bottom quintile in both of the following two years.

There is, in fact, only one fund that managed to not drop out to at least the third quintile within three years of being the top performer. That is the Momentum Best Blend Balanced Fund of Funds, which performed very consistently between 2012 and 2016. This demonstrates how difficult it is to maintain outperformance over the short term.

It’s also worth noting that even the good run enjoyed by the Momentum fund followed four years in which it was consistently in the fourth quintile. Its history over the period from 2008 to 2011 would have given no indication that it would be one of the best funds in this category over the following five years.

There are also two funds – the Cadiz Balanced Fund and Allan Gray Balanced Fund – that went from being in the bottom quartile one year to being the top fund the next. In both cases, these funds also slipped back into at least the fourth quintile within the next two years.

Finally, it’s worth making the observation that it’s impossible from looking at the above table to know which of these funds have been the top performers over this entire period. The Momentum Best Blend Balanced Fund of Funds may look the most consistent, but it is only the 13th best-performing fund in this category out of the 35 funds that have decade-long records.

Over ten years, the top five South African multi-asset high-equity funds are:

Top-performing SA multi-asset high-equity funds to September 30 2017
Fund 10-year annualised return
Rezco Value Trend Fund A 11.56%
Allan Gray Balanced Fund A 10.75%
Coronation Balanced Plus Fund A 10.70%
Investec Opportunity Fund R 10.55%
Personal Trust Managed Fund 10.39%

Source: Morningstar

Also worth noting is that the Cadiz Balanced Fund, which was the top performer in the second year of the decade under review ended the period as only the 25th best out of 35 funds. It delivered an annualised return of only 7.99%.

All of these factors together make it quite obvious that there is little, if anything, to be gained by looking at a fund’s one-year performance. It tells an investor next to nothing about its longer-term prospects.

Portfolio manager at PSG Wealth, Schalk Louw, says that choosing funds purely on their last one year’s performance is simply not a sound way of managing your risk and investments. You have to consider other factors as well:

“Always consider the following criteria when choosing funds: the underlying costs attached to funds, the quality and history of the management team, the fund manager’s abilities to deliver constant (not limited to a one-year period) above-average risk-adjusted returns, as well as the size (in rand value) of the underlying funds. These four factors, in my opinion, are far more important investment aids than to limit your choices to past-performing funds,” Louw says.

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This article is spot on. Shows how difficult it is to pick a fund manager. Perhaps this is a case for passively managed unit trusts at a low cost?

The best of the lot did 10%
Nothing g to get excited about given that inflation was an outstanding 6%. Low cost Etf combo would probably do a lot better but reg 28 is a hindrance. Sa r186 at over 9% so inflation plus 3% risk free.
Do the managers really add value. To their balance sheets maybe but not to clients

Active fund managers are in the same realm as economists – suggestion to all of them – take up tea leaf reading to improve accuracy

“Finally, it’s worth making the observation that it’s impossible from looking at the above table to know which of these funds have been the top performers over this entire period. ”

This is not true. It’s easy, but the outcome varies according to how you want to emphasize more recent values, for example, by weighting, according to the flavour that you choose.

For example, allocating equal weights to all of the ten years, you get:
Coronation Balanced Plus Fund 73%
Investec Managed Fund 67%
Allan Gray Balanced Fund 65%
Rezco Value Trend Fund 64%
Investec Opportunity Fund 62%
Momentum Best Blend Balanced FoF 59%
Autus BCI Balanced Fund 53%
Cadiz Balanced Fund 50%
Dotport BCI Pudential FoF 49%
Nedgroup Investments Balanced Fund 30%

Thereafter, you can weight according to recency: that is, you can weight more recent years more heavily than previous years.

All according to basic statistical analysis (course 101).

Not impossible, just that you can rank the results according to your bias.

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