Old Mutual’s Ventre: Why past performance means nothing

Yesterday’s winners are inevitably dragged down by their own success, Old Mutual Global Investors multi-manager head John Ventre says.

He believes the headline, popular funds are dragged down by the large inflows they attract which make the manager invest through necessity rather than choice.

“There’s a common perception that the long and strong track record gives a clue about future performance, but the data just doesn’t support that,” he said at the FE Investment Summit in London today.

The average first quartile fund from five years ago is now in the 47th percentile, Ventre says.

Meanwhile, eight of the high-fliers have since closed and two of the “flagship” funds of 2009, the Fidelity Special Situations and M&G Recovery funds, are now 83rd and 97th percentile respectively, he adds.

“There is very little information in historic performance – if any.”

“It’s the difference between being a willing buyer or a willing seller, rather than being a forced buyer or forced seller,” he says.

“Big funds underperform small funds. A multi-manager can seek out the small new manager who doesn’t have the burden of that long track record and, accordingly, that large accumulation of assets.”

The information that can be gleaned from past performance is well hidden, but can show how well the manager deals with specific market events and how well they “run winners”, he adds.

That does not help retail investors, who, in the main, buy the wrong things at the wrong time.

Investor returns are determined by when they buy and sell, the investment products they buy and the performance of the manager of their money in the meantime, Ventre says.

“Unfortunately the process is not that simple because investors tend to buy and sell at the least opportune times.”

Research by a US firm shows the US stock market has returned an average 8 per cent annually over the the past 20 years, he says.

The mean asset manager has delivered a return of 7 per cent each year – essentially the index less fees.

The typical client has made just 2 per cent each year, Ventre adds.

“So the cost of the customer’s trading decisions was 5 per cent per annum over the past 20 years – a huge amount of wealth that’s being lost.”

Investors have more chance of outperforming if they make frequent smaller bets with greater chance of payoff than large conviction bets, he says.

Multi-manager funds allow those incremental gains to be gathered most efficiently and at lower cost, he argues.

“We are not here to make some hero call about whether equities are going up or down next month. We shouldn’t have our end customer outcome based on it,  we should be building a selection that has all of those added values embedded.”

However, that does not mean managers should hug a benchmark, he explains.

“When you study the data, it turns out those that are taking larger amounts of active risk tend to perform better.”

While that was “an obvious conclusion”, the data shows risk-averse managers actually had lower risk-adjusted returns than their more adventurous peers.

“Partly because if [high active risk managers] are more skilful they are trusted to take more risk, but also because frankly the benchmarks are really bad at running money – well, certainly the market-cap ones,” Ventre says.

“They tend to ride winners and dump losers in a way that flies in the face of the fund  management ideal of buying low and selling high.”