When looking at investment choices I am often asked what the historical returns have been. Fair enough question.
Unfortunately, the past cannot be used as a measure of future performance - yet I often get the impression that investor’s choices are very much based on the past. But it may be that different economic conditions now exist or personnel changes have taken place and so on. Times change.
Long term returns from asset classes such as shares and fixed interest are useful for developing benchmarks for measuring current performance and for future planning. Short term performance is not as useful.
These thoughts ran through my mind as I re-read a presentation by Michael Hirsch a successful American fund manager.
He referred to the Wyatt study of investment returns and fund's managers in the United States during the 1980's - a period when the markets rose consistently, and the share market returns for the decade were about 18 % per annum.
Wyatt found that of the managers who ranked in the top 20% for the first five years of the decade not one managed to stay in the top 20% for the second five years.
In fact, 72% of them ranked in the bottom 40% for the second five years. That's not just a little slip - that's a nosedive.
It could indicate that a manager having found a winning formula is unable to be sufficiently flexible to change conceptually with the markets.
Michael Hirsch told the story of the tortoise and the hare as it applies to fund managers. The hares are the majority of managers. They go for the dropped goal from 50 metres, the six off the first ball of the over or the hole in one on a par three surrounded by hazards and a difficult pin placement.
The tortoise just plods along slowly every year, no headlines, no press interviews, just slow consistent performance towards the finish line.
And over a ten-year period, what has happened. The tortoise is still maintaining its slow steady progress. No spectacular gains but no catastrophes either.
The hare, however, may have had the odd wrong turn - and if he was really unlucky there may have been a cliff up the end of one of those side roads.
From an investors point of view which performance is more important? Clearly the tortoise is the important performer.
We all need to know our timetable. If it is ten to twenty years (are you less than age 80?) then we would suggest that knowing the last three month or twelve months return of your investments is not particularly useful information.
