Manager of Managers
Perhaps the most troubling aspect of the rise of “wealth management” in India is the notion that the wealth manager will choose for her HNW clients outperforming fund managers. We have shown in our book “Coffee Can Investing: The Low Risk Route to Stupendous Wealth” that such a notion is NOT supported by data – pages 84 & 85 of the book show using data from the Indian mutual funds’ trade body (AMFI) that there is very little persistence in the performance of India’s top 100 mutual fund schemes. In this piece, Joshua Brown, from Ritholtz, makes a similar point in the context of the United States:
“Persistence doesn’t exist. Financial advisors are periodically asked to defend their asset allocation choices to the clients who’ve entrusted their money to them. Financial advisors used to put themselves into the position of selecting active fund managers and then either defending the underperforming ones or making a big show out of firing them, demonstrating their value-add to the client by making manager changes.
It doesn’t work, and not because active managers can’t beat the market or their peers.”
The problem Joshua explains is lack of persistence. If you take the top 5 American equity fund managers in the decade to 2010 and look at their performance over the most recent ten years, the number of fund managers who have outperformed is ZERO! Furthermore, the averages underperformance of these five fund managers over the past decade is 5% points.
Brown says: “You can’t use previous track records to identify the winning or losing managers for the next period of time. There aren’t any performance-related data points that will help you do this as a financial advisor. Morningstar can’t do it. Lipper can’t do it.
We would all love to believe that a fund that has just trounced its peers for five straight years has a higher probability of doing so over the next five years, but statistically it’s just not true.
Ten years ago Morningstar said, based on a review of its entire database, that the fund attribute most likely to predict future fund performance vs it’s peers is having a lower cost. Past performance, brand, pedigree, staff size, etc were not significant drivers of outperformance – so an advisor doing due diligence on these qualitative aspects of a fund was certainly doing her job, but it wasn’t actually helping clients beat the market on a go-forward basis.”