Investment Insider: Less risky funds can make good returns

A money manager’s portfolio can reveal how well they invest

Some money managers are very good at what they do. Some money managers are just plain unlucky. Some don’t try hard enough. And there are some who, to put it bluntly, are simply not up to scratch. To decide which category a fund manager belongs is not easy, especially if you do not have a long enough track record to judge their performance on.

Take Anthony Bolton as an example. Bolton made a name for himself when his Fidelity Special Situations Fund delivered a 20% annual return over a 25-year period. Over the same time span, the benchmark FTSE All-Share Index returned just 7.7%. Does that make Bolton an outstanding money manager? It does in my book. But we also must remember there were long periods when his fund underperformed the market. That could have prompted some investors to throw in the towel, which could have been a costly mistake over the long haul.

Neil Woodford is another money manager in the outstanding bracket. Over a 15 year period, Woodford’s Invesco income funds delivered returns of over 300%. The market only delivered about 40%. But we mustn’t ignore what happened during the huge market rebound in 2009 and 2010. Over those two years, the market jumped 30% and 15%, respectively. Meanwhile, Woodford’s funds improved around 10% a year.

The point is that investors and fund managers should not expect above average market returns year-in, year-out. That is unless they invest through an index tracker, in which case they will always get the market return. The Spot the Dog report by Bestinvest highlights the perils of stock picking. It has exposed funds that have underperformed for three consecutive years by more than 10%. It flagged up M&G as one of the worst underperformers with three funds in the spotlight. None of M&G’s funds underperformed in the previous report.

It is possible to scrutinise the ways that professional money managers look after other people’s money. A popular, though not fool-proof, method is to look at how much risk is taken by a fund to achieve its returns. Risk in this instance is measured by how volatile the returns have been in the past. So, a portfolio whose excess returns, over and above risk-free Gilts or Treasuries, that are less volatile can be viewed as being better than another whose returns are more risky.

The risk-adjusted measure of fund performance, developed by William Sharpe in the 1960s, helps us differentiate between different money managers. From an investor’s perspective, the higher the Sharpe ratio, the better should be the quality of the returns. That is because the excess return has been achieved by taking on proportionately less risk. A study was carried out on Warren Buffett’s Berkshire Hathaway investment portfolio to determine how he has managed to outperform the market by so much and for so long. It was found Buffett’s Sharpe ratio was almost double that of the overall stock market and better than the average for mutual funds over the last 30 years.

His outperformance came from investing in businesses with stable and predictable earnings; buying into companies with high margins and buying stocks that are cheap compared to their book value. In other words, it is not rocket science. It is also something we can do for ourselves.

David Kuo is director of

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific
    In this the person to restore our trust in the banks?

    In this the person to restore our trust in the banks?

    Dame Colette Bowe - interview
    When do the creative juices dry up?

    When do the creative juices dry up?

    David Lodge thinks he knows
    The 'Cher moment' happening across fashion just now

    Fashion's Cher moment

    Ageing beauty will always be more classy than all that booty
    Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

    Health fears over school cancer jab

    Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
    Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

    'I forgive everyone, but I don't forget'

    Fifa president Sepp Blatter issues defiant warning to opponents
    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

    Weather warning

    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
    LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

    High hopes for LSD

    Meet the volunteer users helping to see if it cures depression and addiction
    German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

    Saving Private Brandt

    A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral