Investment Insider: Less risky funds can make good returns
A money manager’s portfolio can reveal how well they invest
Saturday 25 January 2014
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 fool.co.uk
10 tips for taking out a personal loan
Bare necessities of life cost a pensioner £10,000
Employees will be able to request flexible hours in drive to make workplaces family friendly
Credit unions to offer instant online approvals as ministers clamp down on payday loans industry
How to start your own internet business
- 1 Howard Jacobson: Let's see the 'criticism' of Israel for what it really is
- 3 Belgium fan Axelle Despiegelaere lands L'Oreal campaign after World Cup viral photo
- 4 Britney Spears sings 'Alien' without Auto-Tune in embarrassing leaked audio clip
- 5 PornHub begs users to stop uploading video clips of Brazil getting beaten 7-1
Sustained immigration has not harmed Britons' employment, say government advisers
Australia facing international condemnation after turning around Sri Lankans at sea
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
There’s a nasty smell in the political air – and it’s coming from the Tories
iJobs Money & Business
Negotiable: Randstad Education Birmingham: Randstad Education are seeking a Fi...
£12 - £15 per hour: Cameron Kennedy Recruitment: Excellent opportunity to join...
£400 per hour: Orgtel: Technical Business Analyst - Banking - Bristol - £400pd...
£38000 - £42000 per annum + competitive: Real Staffing: Required skills:Previo...
Day In a Page
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay