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Just a glance at one of the large unit trust categories shows how widely dispersed returns can be.
Top performance shouldn’t be the priority for most unit trust investors, but returns are important.
Therefore choosing the “right fund” is important.
How to choose the right fund
Unfortunately the decision is often made based on the top performers and on performance over a relatively short space of time.
Performance tables are probably the worst guides for unit trust selection.
Based on Standard & Poor’s semi-annual persistence scorecard that tracks the performance consistency of actively managed equity mutual funds in the United States, Acsis conducted similar research on South African equity unit trust funds.
The results were also similar: that very few funds managed to consistently repeat top half or top quartile performance, showing that investors should look further than performance tables when choosing funds.
Acsis investment analyst Michael Dodd likens unit trust performance tables to the form guides at a horserace.
“Those who followed the form guide and placed money on the main race at the J&B Met in Cape Town earlier this year would have learnt a valuable lesson."
"From the information available in the form guide, Pocket Power was clearly the strongest contender, having won the race for three consecutive years." said Dodd.
"So those punters who based their decisions purely on the information in the form guide would have put their money on Pocket Power."
"Sadly, they would have been highly disappointed to see Pocket Power finish third in this year’s race. In that way, the form guide provided very little indication of future performance,” said Dodd.
Among other things, Dodd found that for the performance of actively managed SA equity funds over three consecutive one-year periods only 10 of the 74 funds that qualified (13.51%) managed to consistently achieve top-half performance.
None maintained a top quartile ranking over the period.
He compares that to a random act, such as flipping a coin and getting three heads in a row.
'Toss a coin'
“The probability of tossing three heads in a row is 12.5% – so the research results show the probability of consistent top-half performance at 13.51% is only marginally higher than a completely random outcome.”
Analysis over longer time periods also showed a lack of top quartile consistent performance. For 10 years, while Dodd points out the small sample size limited the value of comparisons, he found only one out of 24 funds managed to achieve top quartile performance in both five-year periods.
The Acsis study offers clear evidence that trying to choose the right fund from the top performers doesn’t work.
Dodd says the data shows that merely selecting funds from a performance table holds no statistical significance.
“Implying that investors could achieve the same results by simply tossing a coin.”
So what should investors be looking for when selecting a unit trust?
Dodd says while a good performance track record is important “other vital aspects to consider are the people (fund managers), the investment philosophy and processes”.
Do your homework
Much of that information can be obtained simply by visiting asset management websites, where – apart from the latest fund fact sheets – additional commentary from the fund manager is often included.
Most unit trust companies also conduct regular road shows, where investors can meet and question the fund managers.
Sceptics might say you may as well choose unit trust funds by throwing darts, but finding out more about the manager and what the fund aims to achieve – and if it’s doing that over the longer term – is the intelligent way to determine the right fund.
- Finweek
Top performance shouldn’t be the priority for most unit trust investors, but returns are important.
Therefore choosing the “right fund” is important.
How to choose the right fund
Unfortunately the decision is often made based on the top performers and on performance over a relatively short space of time.
Performance tables are probably the worst guides for unit trust selection.
Based on Standard & Poor’s semi-annual persistence scorecard that tracks the performance consistency of actively managed equity mutual funds in the United States, Acsis conducted similar research on South African equity unit trust funds.
The results were also similar: that very few funds managed to consistently repeat top half or top quartile performance, showing that investors should look further than performance tables when choosing funds.
Acsis investment analyst Michael Dodd likens unit trust performance tables to the form guides at a horserace.
“Those who followed the form guide and placed money on the main race at the J&B Met in Cape Town earlier this year would have learnt a valuable lesson."
"From the information available in the form guide, Pocket Power was clearly the strongest contender, having won the race for three consecutive years." said Dodd.
"So those punters who based their decisions purely on the information in the form guide would have put their money on Pocket Power."
"Sadly, they would have been highly disappointed to see Pocket Power finish third in this year’s race. In that way, the form guide provided very little indication of future performance,” said Dodd.
Among other things, Dodd found that for the performance of actively managed SA equity funds over three consecutive one-year periods only 10 of the 74 funds that qualified (13.51%) managed to consistently achieve top-half performance.
None maintained a top quartile ranking over the period.
He compares that to a random act, such as flipping a coin and getting three heads in a row.
'Toss a coin'
“The probability of tossing three heads in a row is 12.5% – so the research results show the probability of consistent top-half performance at 13.51% is only marginally higher than a completely random outcome.”
Analysis over longer time periods also showed a lack of top quartile consistent performance. For 10 years, while Dodd points out the small sample size limited the value of comparisons, he found only one out of 24 funds managed to achieve top quartile performance in both five-year periods.
The Acsis study offers clear evidence that trying to choose the right fund from the top performers doesn’t work.
Dodd says the data shows that merely selecting funds from a performance table holds no statistical significance.
“Implying that investors could achieve the same results by simply tossing a coin.”
So what should investors be looking for when selecting a unit trust?
Dodd says while a good performance track record is important “other vital aspects to consider are the people (fund managers), the investment philosophy and processes”.
Do your homework
Much of that information can be obtained simply by visiting asset management websites, where – apart from the latest fund fact sheets – additional commentary from the fund manager is often included.
Most unit trust companies also conduct regular road shows, where investors can meet and question the fund managers.
Sceptics might say you may as well choose unit trust funds by throwing darts, but finding out more about the manager and what the fund aims to achieve – and if it’s doing that over the longer term – is the intelligent way to determine the right fund.
- Finweek
