Not all investment funds are the same. So how do you choose which ones to trust with your money? Many DIY investors head straight for the 5-star fund managers, but new evidence suggests that top fund managers don’t always retain their ratings.
Industry researcher Morningstar employs a star rating to grade fund managers with 5 being the highest score. The Wall Street Journal recently researched the performance of 5-star fund managers with data going back to 2003. It is concerning to note that only 12% had managed to retain their 5-star rating a year later, with 10% dropping to 1-star.³
Just 1.24 per cent of active funds consistently delivered top quartile performance over the past three years, according to research by BMO Global Asset Management.²
Kelly Prior, investment manager at BMO, said: “Fund managers are still finding it challenging to deliver consistent performance over the long-term. While we have seen a slight increase in the number of funds delivering top quartile performance over three years, it’s still falling short of the industry average.”²
Renowned fund manager Neil Woodford has suffered negative media coverage of late because of the performance of his fund, though he himself stresses that markets are a “long game.”⁴ Woodford, famous for his success in snubbing banking equities in the run up to the financial crisis of 2008, was shelved last year by one of his long term and significant supporters, Jupiter Asset Management amidst industry speculation that Woodford had lost his knack.
Something else to consider when weighing up the costs of a fund manager, is what you’ll get for your money a few years down the line. Top performing fund managers often attract big media coverage with fees to match.
You need to be aware the increased costs the employing a fund manager brings. In good times, where your gains may be healthy then you may not be bothered by the extra fees. But think back to a few weeks ago in early February when the FTSE took a tumble. A fund manager still bears the same costs whatever the outcome in good times but in bad ones too.
Markets go up and down of course and as I always say, you need to think long term about these things. Passive investments, on the other hand, tend to rely more on this type of view and “buy and hold” shares rather than reacting to short term situations or speculations as a fund manager may.
Bespoke financial planning is best
Like many aspects of financial planning this is a complex subject. My advice is not to look at the fund manager first. Initially you should set out your objectives, consider what other assets you have and assess your risk tolerance based on when your objectives need to be realised. The proportion of equities in your overall portfolio should be considered carefully as should their geographical spread. I wrote recently about the tendency of some investors to have a strong bias to UK shares very often for purely anecdotal reasons.
The ultimate decision on what you do should be based on individual circumstances. By taking proper financial advice you will at least approach your decision with your eyes open and in possession of the facts. You will also have some options to consider, based on your own attitude to risk and your personal goals and circumstances. The nature of tailoring financial planning to your own needs is critical if you want to achieve your financial goals.
Please don’t hesitate to get in touch if you’d like some help with your own investments, pension and retirement plans. I’ll be happy to chat on the phone or meet with you. Until next time, thanks for reading.
² FT Advisor 22/1/18
³John Stepek, MoneyWeek, December 2017
⁴ FT 13/10/17