Judging Fund Performance: What is most relevant?

You will note we had stated in June 2015 in a friendly pre-launch note “We do not, like most NAV oriented institutions, focus on daily, weekly, monthly, quarterly beating of the markets on a consistent basis. We find on a risk adjusted basis almost none of these players manage to beat the general markets( if they do at all beat absolute benchmark numbers they do so by taking higher risk than the benchmark embodies). The near term markets in which these institutions participate embody the definition of efficiency by being instantaneously efficient; all new information is immediately incorporated in prices, it is impossible to outperform such a market unless one has access to insider information, which is illegal anyways”.

It is imperative to look at third party data for justification. We have attached a link to SPIVA or S&P index versus active management analysis here which you can click (SPIVA link ) to get a note on for example how in the large cap strategy, looking at a 5 year horizon, 60% of funds do not perform the benchmark. We believe if you take into account the higher risk taken, by a few of the benchmark beating funds ( by buying some of the portfolio outside the large cap universe or taking some other factor exposures other than size), you will find very few funds have actually beaten the index, after  adjusting for risks taken.

It is important when you meet these fund managers you ask them, how they define risk in their portfolio and what kind of lead or lag of performance with respect to indices does the risk expose you to. Do not be satisfied till you get a precise answer, from anyone who you hand your money to. We expect a large majority will give you vague answers (which shows up in their long term performance).These people manage for daily returns and still tell you to invest for the long term, when they themselves don’t follow their own advice. Portfolio turnover is an indicator of what the risk measurement horizon of the fund manager is; anything less than 3 years i.e covering less than half of a business cycle is laughable, 5 to 7 years is the best targeted horizon, so that fund managers advice , market cycles etc all coincide.

Do not judge a fund manager unless you have seen at least one business cycle of money management from him. In the meanwhile focus on his risk management process; if this is poor, your portfolio/investment is as good as fried/ disaster hit, unless of course divine providence is with you.

In your service

Dinesh da Costa, CFA                                                                                                       

Zara Investment Advisory

www.zarainvestmentadvisory.in

  

Please note information given above is not a recommendation to invest, but an educational illustration.

Please leave your comments by emailing at dineshd@zarainvestmentadvisory.in  or if you have a Google account by clicking on the link below