Square Mile: Beware the asset manager marketing gloss

Boardroom-Hire-Hiring-Appointment-General-700x450.jpg

The power of presentation is arguably at its most potent in modern politics. The first televised presidential debate between a sickly vice president Richard Nixon and calm, confident senator John Kennedy in 1960 – still one of the most watched programs in US broadcast history – is surely testament to that. Whether in the US or closer to home, nowadays the electorate tends to favour politicians they ‘like’ and ‘trust’ over those that appear ‘able’ and ‘skilled’, making the personality of the politician even more important.

Perhaps the best example of the art of spin is the lesser known tale of Mexico’s motorways. It all started with a bright idea from the country’s ministry of transport sometime around the 1960s or 1970s. At the time Mexico was planning to expand its motorway capacity but faced the familiar conundrum of having plentiful political capital and not enough financial.

With the upcoming election front of mind, the Ministry of Transport set about remarking the two-lane highways as three lanes in an attempt to create a speedy – and cheap – solution. The impact was immediate but in no way wholly positive. Road capacity increased by 50 per cent and with it the accident rate soared to the extent that the roads actually had to be returned to their original state. However none of this was enough to put off the incumbent politician from leading his re-election campaign with the line that he had successfully increased the road network by a net 17 per cent during his time in power. This was achieved through increasing capacity by 50 per cent less a decrease of 33 per cent.

But enough of politics. After all, it is by no means the only area of our lives where we face this type of influence. Closer to home, fund selectors share similar biases. However illogical, we are all prone to influence in ways that we know we shouldn’t be.

I would like to consider myself both discerning and objective but I can recall several funds that, with hindsight, I should have avoided at the time and, on reflection, the personality of the fund manager sometimes had undue sway in the decision. Then there is the perennial question that regularly plays out in the financial press of whether to stick with a fund whenever a manager switches to another investment house or leaves the industry altogether. Much of this debate maintains a focus on track record and investment style but it can be hard to separate these from the personality of the fund manager.

squaremile

It is not only personalities that can sway fund buyers. Consider the data displayed on the marketing materials for any given fund. All charts and data can be incredibly sensitive to the starting point. For example, a fund launched seven years ago as the bull market got under way can be viewed very differently to those that first appeared during the bear market eight years ago.

Nevertheless, any favourable data that appears in a pitch book still makes for a compelling sales tool, even flukes will be happily seized upon by a marketing department operating somewhere behind the scenes. These departments spend countless hours plotting on how best to present their funds, although it must be acknowledged that more flagrant practices in relation to performance data are prohibited by current regulation.

It may be one thing for a marketing team to turn a plain Jane fund into a supermodel but it is quite another if the fund buyer starts playing the same game. Clearly someone with £160 is not 10 per cent better off than another who has £150. Yet all too regularly investors will kid themselves that a fund up 60 per cent versus an index up 50 per cent has outperformed by 10 per cent.

It is possible to overcome a number of these shortcomings, particularly when it comes to data. Reviewing performance records over a number of discrete periods is one approach, although it is not without its limitations. It is commonplace for funds to advertise their annual rankings, for example, but does a calendar year performance actually have more significance than any other 12 month period?

Then there is rolling data, our preferred option at Square Mile. Although not perfect, what rolling data does provide is a better indication of what the fund has achieved and what the performance has been like for the average investor: a far more instructive method for establishing if a fund is meeting its performance objectives.

It is true that in some cases these distinctions may be sweating the small stuff but it can be all too easy to allow lazy thinking into fund analysis. Good fund analysis should be all about looking beyond the marketing gloss and ensuring that your own biases don’t distort the view.

Jason Broomer is head of investment at Square Mile