Do you want to know how your investment manager do with managing your portfolio? It’s harder than it looks.
You can take your quarterly or annual returns and compare them with publicly available data. Stock market indices, such as the FTSE 100, may be the obvious place to start.
But you will soon realize that it does not really work. What really matters in judging the manager’s performance is to rate it on an indicator that has a similar exposure to risk as your choice of stocks and bonds.
In other words, if you asked your manager to be careful, you should not be surprised if your portfolio has stayed behind the stock market as a whole in a good year for stocks.
Similarly, if you have instructed your manager to be brave and take greater risks in the hope of generating greater returns, you should not be shocked if you have outperformed the market in a bad year . This is what risk management is all about. This is what you pay for in the first place to hire the manager.
Of course, investment managers prepare multiple sets of figures to share with clients. It often compares a portfolio with selected indices or a model portfolio with a similar risk / reward balance.
But it’s often hard to be sure you’ve got a fair picture. Managers tend to promote good performance periods and downplay the poor. For example, a driver who has performed well over three years but badly more than one could call the number in the longer term and bury the 12-month performance. Or they may be looking for an index that flatters their own results in some way.
Smart investors can opt out of many of these. And calculate whether levies are included or not. But even for savers who are ready to do the job, it is still difficult to find accurate independent reference points.
One company that offers to make life easier is ARC, a UK-based consulting firm that has long provided comparative data to investment managers. ARC collects information from 119 investment managers who together manage no less than 300 000 private client portfolios worth about £ 1.5 ton. It is mainly British money invested in pounds sterling.
ARC aims to attract more retail investors this year to look at data via his website and a free application. The company hopes to make a profit by increasing its visibility in the market and thus gaining more business from investment management companies.
ARC shared preliminary figures for 2021 with FT Money, which classifies Sterling-based investment portfolios into four groups according to risk – prudent, balanced asset, steady growth and equity risk. The categorization is not based on portfolio composition (the percentages of equities, bonds and cash), but on previous volatility compared to general equity volatility.
It is not surprising that the risk-on investments performed well last year given the overall rise in stock markets. On ARC’s figures, equity risk managers delivered 12.5 percent, ahead of Steady Growth at 10.5 percent, Balanced Asset at 7.8 percent and Cautious at 4.3 percent (all after deducting annual levies and commissions).
Given the good winds that have been blowing through markets over the past decade, risk-taking has also been a winning approach over five and 10 years, as the table shows.
What is in a way more interesting is that the light has shone on the differences between managers within the same group. ARC data show that in the Steady Growth group, the largest category in terms of portfolios, a 75th percentile manager – a top mid-level performer who performs better than three-quarters of their peers – has cumulative returns of 110.0 percent over 10 year made. That compares with 91.7 percent for a competitor on the 25th percentile, a lower mid-level performer. This is a gap of more than 18 percent.
Even in the Cautious group, where managers take fewer risks, the gap was 11 percentage points – 53 percent versus 42 percent. For Balanced Assets it was 14 percent and for high risk Equity risk 16.4 percent.
Are the top managers consistently the best? This is a centuries-old question in investment management. The traditional fund management industry is based on the premise that a good manager can beat the market. Meanwhile, industry critics have long said success in active management is largely a matter of luck. Take a passive approach and save on fees.
ARC suggests that there is still hope for the active driver. It states: “While virtually all current top quartile managers had periods of underperformance over their peers, top quartile managers tended to spend more than half the time in the top quartile. That general result is reflected for lower quartile managers. ”
Unfortunately, ARC keeps the names and results of individual managers secret from investors. It only shares the collective data with the industry and investors. You can therefore not use it to identify the top firm and convert your funds. But you can use it to check your investment manager’s performance – and your own.