The tricks of the trade
22 Feb 2013
We all know that we cannot always believe what we read, yet what else do we have? In the investment world this conundrum is an advertising manager's dream. Below we look at some examples from the funds management and industry superannuation funds.
Let's consider a performance report from a typical fund manager. It will generally show results from left to right reading: 1 month; 6 months; 1 year; 2 years; 5 years and 'Since Inception', and then compares those to their benchmark. Does a good representation across these time periods mean the fund has always delivered? Unfortunately not. Some funds change the benchmarks!
For example, one enhanced yield fund commenced life targeting returns of Reserve Bank of Australia (RBA) cash rate plus 3%pa. Then, as their performance struggled to keep up, they now just target the RBA cash rate as their benchmark! Looking back it makes their results look reasonable – but it's not the real truth. But how are you as an investor meant to know that?
Then there is the switching of the performance sequencing to report in reverse: Since Inception, 5 years; 2years; 1 year and so on, to emphasise long-term results when the fund may have had recent underperformance. As readers we are drawn to read from left to right. This is what the advertisers want.
A client of mine once wrote to an Industry Super Fund asking them to confirm that their unlisted asset valuations were 'marked to market' and the response was that they were. However, in the subsequent 12 months (behind the market) that fund had to drastically reduce those values and investors suffered steep declines as a result. I wonder how many investors were drawn into the recent strong performance from that fund only to be hit when these revaluations finally occurred?
Another is where advertisements will spruik past performance, which might look good over all time periods, however the results might have come from one great year in five, whereas the other four years underperformed. This most recent year has dragged the prior years performance up, however, I doubt investors would have been that patient.
But the greatest one of all is the 'new' fund. Some managers will build a fund, often using their own money, and if it does well then they will bring it to the market – with the history of performance that you couldn't even access! Can you guess what happens to the start up funds that don't perform – well, they never existed.
So next time you review performance tables or advertisements, make further enquiries before you commit your hard earned money. It is very rare that the fund or investment that has just performed well will repeat the same performance next year. We are all drawn to the best performance of recent times, however, by knowing the 'tricks of the trade' can help you assess their true capabilities. If there is one rule to remember, it is that if it sounds too good to be true, it probably is!
Financial advisers have access to strong internal and external research, and with the knowledge of the market, we can help guide our clients through this otherwise confusing advertising minefield.
That's the value of financial advice!
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