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[Pata-Hari]

Jury out on top fund persistence
By Steve Johnson

Published: March 28 2010 10:27 | Last updated: March 28 2010 10:27

Investment companies should reward their star fund managers more lucratively and sack poor performing managers more quickly, according to research by Cass Business School’s Pensions Institute.

The Institute concluded that past performance is no guide to future returns in the fund industry because successful, skilled fund managers jump ship and the highest returning funds attract sizeable inflows that render them less nimble.

EDITOR’S CHOICE
Small team goes for big equity sector - Mar-28Technology helping to tame the wild financial markets - Mar-21International and emerging market equities finding favour - Mar-21Rewards for hand-holding - Mar-21Calastone delivers on automated settlement - Mar-21Take the risks you have control over - Mar-14In contrast, poor performing funds that suffer significant outflows and fire their fund manager tend to improve their performance.

“Losing fund managers seem to be incapable of extricating themselves from losing positions without external prompting, so the investment management company needs to replace them much more quickly,” said Prof David Blake, director of the Institute and co-author of the report*.

However, a separate study by Aviva found that for multi-asset unit-linked life and pension funds, buying the previous year's winners was a successful strategy.

Over the past 20 years, Aviva found that top quartile funds returned, on average, 8.3 per cent in the following year, while previously bottom quartile funds made just 7.1 per cent.

Its analysis of the £200bn (€222bn, $297bn), 1,675-fund strong sector found funds were significantly more likely to be in the same quartile in consecutive years than if performance was purely random.

“I was taken aback to see not only was there persistence [of performance], but that it was statistically significant,” said Jason Josefs, manager of Aviva’s £16bn multi-asset book, who compiled the research. “You should think about buying the best performing funds.”

However, the Cass study suggests that persistence of performance does not exist for mutual funds, even though some managers are more skilled than others.

Based on a sample of almost 4,000 US equity funds between 1992 and 2007, the research found if the manager of a “winner” fund (top decile in the previous year) departed, performance deteriorated, on average, by 1.21 percentage points the following year. If the fund also experienced above-average inflows, the deterioration rose to 2.29 percentage points.

A “winning” fund that both lost its manager and had strong inflows undershot a winning fund that saw neither of these effects by 3.60 percentage points.

“A successful fund is going to get an awful lot of flows coming in. If you try and scale-up the investments you dilute performance,” said Prof Blake.

The effect is so strong that top decile funds in one year will typically be the very worst performing ones two years later.

The deterioration occurs even when the star manager of a large fund house leaves, the analysis found, suggesting even the industry heavyweights do not have large enough talent pools to compensate.

In contrast “loser”, or bottom decile, funds that sack managers and suffer strong outflows improve their performance by 3.00 percentage points the following year.

Prof Blake believed Aviva’s findings reflected a degree of momentum in performance from one year to the next, as well as the fact that life funds are less susceptible to damaging “hot money” flows than mutual funds.


* Why does Mutual Fund Performance not Persist? The Impact and Interaction of Fund Flows and Manager Changes by Wolfgang Bessler, David Blake, Peter Lückoff and Ian Tonks

[Pata-Hari]

E, já agora, no teu artigo, além dos custos de gestão, esquecem-se de mencionar a parte do fundo que fica alocada a liquidez versus um indice full-invested e que faz com que a performance seja sempre um lagger (excepto quando o benckmark corre mal, claro, e nesse caso a liquidez também serve de almofada).

(viste como me estou a tentar redimir da distracção, viste??)

[Pata-Hari]

(estamos a falar de artigos diferentes.... o que eu estava a pensar é o artigo de hoje do FT em como faz sentido kickar os gestores com menores performances e o como os bons gestores tendem a manter as out-performances).

[Pata-Hari]

Não sejas assim.... tinha o gráfico com as performances dos fundos em função das performances do ano anterior. E traduzia perfeitamente a afirmação. . Este pessoal tem tão mau-feitio, tse, tse.

[LTCM]

Sim, vi isso. Os gráficos eram giros

[Pata-Hari]

Sim, vi isso. Os gráficos eram giros

[LTCM]

THE INTELLIGENT INVESTOR
MARCH 27, 2010
Why Fund Managers' Hot Performance Isn't So Hot
By JASON ZWEIG


Where have all the geniuses been hiding, and why have they suddenly been popping up everywhere?

When the first quarter's performance numbers come out next week, they will likely look impressive—again. In 2009, 95% of intermediate bond funds beat the Barclays Capital U.S. Aggregate bond index, according to Lipper Inc. And 68% of diversified U.S. stock funds beat the Standard & Poor's 500-stock index. Year to date, 58% of stock and bond funds alike are earning fatter returns than their benchmarks.

So does the average fund manager—long derided as the functional equivalent of a blindfolded chimpanzee—deserve an apology and a round of applause?

With funds performance numbers doing so well, many fund managers are looking like geniuses. But Jason Zweig says not so fast. He explains to Kelsey Hubbard how indexes don't always reflect what fund managers are doing.

In a word, no.

Consider the Barclays Aggregate, the market average against which many taxable investment-grade bond funds compare themselves. It gained 6% in 2009. The average intermediate bond fund, meanwhile, was up 14%.

Why? Two-thirds of the Barclays index consists of bonds issued by the U.S. Treasury and government-related entities. Corporate bonds are only 18% of the benchmark.

According to Morningstar Inc., the average intermediate-term bond fund looks very different—with about half its assets in government bonds, nearly 40% in corporates and almost 10% in foreign debt.

Why do funds deviate from the index? Funds charge expenses; market averages don't. A fund with 1% in annual costs has to beat the index by one percentage point to justify its fee. That prods managers toward riskier bonds: longer in maturity, lower in credit quality than Treasurys, or both.

Bond managers also have gotten a boost from Uncle Sam. Now that the U.S. has issued roughly $2 trillion in new debt to bail out the financial system—including $118 billion last week—government bonds make up even more of the index. At year-end 2007, Treasury securities were 22% of the Aggregate index; today, they are more than 29%.

That has shackled the index. Ten-year Treasury bonds lost 9% in 2009—while intermediate corporate bonds gained 16% and below-investment-grade, or "junk," bonds returned more than 57%.

Deviating from Treasurys by design, the average bond fund beat the index in 2009—and continues to do so this year. Thus, "it should be getting easier for active bond managers to beat the market," says Gregory Seals, fixed-income director at the CFA Institute in Charlottesville, Va.


But the recent hot streak among bond funds is merely the inverse of 2008, when Treasury bonds excelled and everything else smelled. Intermediate Treasurys gained 18%, while high-quality corporate bonds broke even and junk bonds fell 30%. That year, 87% of all taxable-bond funds lagged the Barclays Aggregate index.

It is a similar story with stocks. Ever since mutual funds began in 1924, they have always favored stocks that are smaller than the market average. Managers tend to own roughly 100 stocks—versus the 500 in the S&P index—and to have more concentration in the smallest among them. Therefore, managers outperform the S&P 500 whenever small stocks do better than large.

Take 2009: The stocks that had fallen the most in the crash fared best in the recovery. Small stocks lost 26% in the fourth quarter of 2008 and 15% in the first quarter of 2009, before soaring 27% for the year. So the apparent brilliance of many managers is merely the flip side of their earlier inadequacy. In 2008, only 37% of diversified U.S. stock funds beat the S&P 500, even as the index lost more than a third of its value.

What about the longer term? As of last week, 60% of diversified U.S. stock funds had beaten the S&P 500 cumulatively over the past 10 years—a striking reversal of the historical record, since roughly two-thirds of funds have trailed the index in the long run. But if you measure the funds against an index that includes small stocks, the rate of outperformance drops to 55%. Count the track records of the hundreds of funds that went bust and the winning proportion falls below half.

So the world hasn't been turned upside-down. Fund managers haven't become a flock of Einsteins, and low-cost index funds remain the best choice for most investors .

Write to Jason Zweig at intelligentinvestor@wsj.com