Beating the market

Dominic Thomas
May 2023  •  12 min read

Beating the market

Hopefully as a client, you understand my views about investing over the long term. One of the many constant challenges to investing is the fear of missing out. This is particularly apparent when you see a chart or data revealing the outperformance of a particular Fund Manager (these are known as active fund managers). There is a tendency to imply that the Fund Manager is particularly skilled and should be looking after your life savings.

The problem is that invariably you learn this after the fact. After the outperformance has been achieved, investing at the beginning was no ‘sure thing’, but it all appears all so obvious in hindsight. The Fund Manager now sits towards the top of the tables and you probably ask yourself “why haven’t I got any of that?”.

Well, because it’s difficult to pick winning fund managers. It’s even harder to pick one that provides continued success, they invariably tend to revert to average. I get emails every day from Fund Management groups attempting to change my mind and use their funds, which have of course performed rather well lately, picking up awards along the way, (otherwise they would have nothing to say). I might argue that this is like awarding someone that has simply tossed a coin a few times – a bit unfair, but not miles off the truth. What I find amusing is their commentary about how they are positioning their fund for the new current conditions. In other words, all the choices that resulted in that great performance is changing, underpinned by a belief that they have unique insight into the future. So do they?

Standard and Poors (S&P) are one of the agencies that rate funds and assess performance data. So in the interest of proving my point of view (I am aware of bias). S&P assessed European Funds (including the UK). I quote:

  • Very few actively managed equity and fixed income funds managed to maintain consistent outperformance relative to their peers over the three or five-year periods ending in December 2022
  • Of the actively managed Europe Equity and U.S. Equity funds whose 12-month performance placed them in in the top quartile of their respective category as of December 2020, not a single fund maintained its top-quartile performance over the next two 12-month intervals
  • Over a five-year horizon, it was statistically nearly impossible to find consistent outperformance. Among the 1,102 actively managed funds whose performance over the 12-month period ending December 2018 placed them in the top quartile in one of our reported categories, just two funds remained in the top quartile in each of the five subsequent one-year periods ending December 2022
  • Over discrete five-year periods, a greater-than-expected proportion of funds in three of six equity categories and two of four fixed income categories maintained relative outperformance. If performance were purely random in terms of comparing funds to their peers, one would expect 50% of top-half funds to remain in the top half over a subsequent five-year period. Our scorecard reports that an unweighted average of 54% of top-half Emerging Markets Equity and High Yield Bond (EUR) funds remained in the top half for two consecutive five-year periods
  • Over the long term, poor performance has proven to be a reliable indicator of future fund closures. Across the 10 categories reported by our scorecard, an unweighted average of 37% of actively managed funds whose performance placed them in the bottom quartile in the five-year period ending December 2017, were subsequently merged or liquidated over the next five years, while the comparable figure for funds whose performance placed them in the top quartile of performance for their category over the five years ending December 2017 was just 20%

Source: SPIVA European Persistence Scorecard: Year-End 2022 (May 2023)

If you wish to see the S&P report, do click here!

In short, there is about as much skill as there is luck when it comes to picking the ‘right’ companies to invest in. Active funds cost a lot more than passive funds (a terrible way to describe patience).  One of the few things that we can control is the cost of investing, we can minimise it. At Solomon’s, the portfolios we use are weighted to global market sizes and are very low cost. In fact, the cost of the mix of funds is lower than 99% of all others. The portfolios are not available to anyone, cannot be accessed as a DIY solution and represent extremely good value.

The returns will reflect market realities and how much of your portfolio is held in global shares or bonds and cash. This ‘asset allocation’ is where the bulk of investor returns reside over the long term.

The most important ‘normal’ investment experience is that of underperformance. Over the long term the vast majority of funds underperformed. Active management takes more risk with your money by being selective and charges more; the results are poor; the winners are rarely investors and I might suggest a cursory glance at the remuneration of fund managers may provide some insight into who is.

Beating the market2023-12-01T12:12:32+00:00

What We Believe About Investing

I’m working on the new website which will hopefully go live at tomorrow. I was working on trying to describe our investment process and what we believe about investing,  then came up with this (which is not our investment process) but thought it may be of interest. I’d welcome feedback, I’m very tempted to put it as a page within our new look site.

What We Believe About Investing

  • Long-term investment in equities and equity-like investments should provide a better chance of beating inflation over the long-term than cash, for which there is considerable historical evidence.
  • Cash is an important asset class and one that provides necessary reserves for living and unforeseen events. Everyone should therefore have some cash.
  • Inflation is a vital element in determining real returns.
  • It is not possible to consistently beat the market.
  • New investments are made with a time-frame of a minimum of 5 years.
  • Existing portfolios need to be carefully reviewed in light of target dates.
  • The future is unknown and that markets and investors behave erratically.
  • It is very unwise to borrow money in order to invest it and we do not advise it.
  • Nothing is guaranteed in real life, investment is risky.
  • It is possible to lose all your money.
  • Markets will go down, they will also go up.
  • Investing should not be entertainment.
  • If something sounds too good to be true it probably is.
  • If you don’t understand the investment, don’t invest.
  • There is little point in paying investment managers to outperform the market if they fail to do so consistently.
  • Part of our role is to minimize the cost of investing, not the entire role.
  • Tax should not the primary reason for investing.
  • It is very difficult, if not impossible to “time the market”.
  • Money is something to serve us, not the other way around.
  • There are very few successful DIY investors, but far more “how to” finance authors.
  • Investing is often emotional, successful investing is not, it is a disciplined process.
  • Compound interest is a lovely theory, but returns are not fixed, it remains theoretical.
  • You can only control the things you can control; you cannot control the market (legally).
  • Be prepared for disappointment, but remember that good things happen too.
  • Diversification reduces risk and returns, which is appropriate for most investors.
  • Sadly, you cannot have a high return without risk.
  • There is no such thing as the best investment, just a suitable one.
  • Insider trading is illegal, but being observant is not.
  • For any business to continue it must make a profit.
  • Historic performance data tells you what might have happened, not what did happen; actual performance is what you get because of what you did.
  • However harsh, tough or burdensome the regulation, there will always be crooks.
  • You cannot spend a %, you can only spend money.
  • The market is a place where people agree a price for disagreeing about the value of something in the future. Remember that it is a place for buyers and sellers.
  • If everyone else is doing something, that is not a good enough reason for you to do it too.
  • When your friends, colleagues or family offer financial advice, make sure that they are willing to be sued if it transpires that it isn’t legal, compliant or simply wrong.
  • You will not be the next Warren Buffett; even he struggles to be Warren Buffett each year.
  • You are wasting your time if you are looking for the next Apple or Microsoft.
  • A great investment strategy is worthless unless you implement it.
  • There is an awful lot more to life than “keeping up with the markets”, the media reports what has happened and speculates what might happen. If you think about it, this is remarkably like a trip to a fortune teller. If you throw enough out there some of it sticks.
  • Capitalism, by its very nature will morph into something that the market wants.
  • Insurance is something you need when you don’t have capital, it is a “replacement cost” if you do.
  • A bad investment experience should be used as a learning opportunity.
  • Don’t forget the investing lessons you have already learned.
  • As others have said, constantly repeating the same behaviour whilst expecting different results is a form of insanity.
  • Experts disagree.
What We Believe About Investing2023-12-01T12:23:05+00:00
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