A successful investment management firm offered the following inspiration to would be successful investors in one of their newsletters:
“To be a successful investor you have to remember one thing - maintain a diversified portfolio that’s positioned away from risky assets”.
They go further: “diversification means spreading your money across the share market, the property market and the fixed interest market - as well as individual investments within those markets. Positioning away from risky assets means constantly reducing your exposure to shares, or property or fixed interest if you judge any or all of those markets are overheating.”
This advice is beyond the skills of most investors which tends to highlight the benefit of professional managers I suppose.
This firm were an example of managers who have been consistently able to match the market - and there are others who have managed to do the same. And yet the media often seem to take a negative slant with managed funds.
Headlines such as “Funds Fail to Add Value” are not unusual.
That particular article noted that “NZ fund managers are not adding value to investor’s money. In fact, they’re reducing it”.
Reading further through the article we were advised that “of the 197 funds surveyed, 43 added value, 72 provided a risk adjusted return not significantly different from their benchmarks and 82 funds reduced value.”
By our calculations that means that nearly 60% matched or bettered the market indexes they were being measured against.
There will always be those managers who are less than average, and we seek to avoid them by utilising independent research to isolate those managers most likely to perform. We also diversify between different managers.
A second issue is to ask if we, as individual investors, were left to make our own investment decisions how well would we do?
My feeling is that the professional fund managers would beat us 9 times out of 10 - by which we mean that not only does the average investor not tend to match the market indexes, often they significantly underperform them.
Why? Because investors use too much emotion with their own investments, lack skill and knowledge and economies of scale, don’t cut mistakes loose, tend to focus on the short term and so on.
If we judge a professional manager against the benchmark of how we ourselves would perform there is no contest - the professional manager would be a clear winner.
