Bull Markets create Investment Geniuses

NZ Super fund fiasco and the enormous salary paid to the CEO. A familiar ring!

Bull Markets create investment geniuses”. Over the last few weeks of 2014 I cast my eye over a range of articles on fund Managers, Fund performance, risk allocation etc. looking for performance indicators and smart investment practice. Greg Peacock in his article “How to choose a fund manager” said a quick analysis of the last 5 years of the share market, produces the perception NZ is full of quality investment talent. The same analysis for the previous 5 years produces the opposite result. Where Greg Peacock and I part company is when he talks about being wary of low fees, and to employ the best active managers.

My starting point is there are very few of those individuals around, and if you can identify them best of luck. My viewpoint is supported by Bait Frijns of the Auckland Centre for Financial Research at Auckland University of Technology, who found in his research no evidence that local fund managers could time the market to their favour, or systematically beat a global performance measure. Further reinforcement of this point of view is provided by Gary Porter and Jack Trifts, in their 2014 study “The career path of mutual fund managers, and also “The rise and fall of performance investment “who concluded that “even long term managers show no ability of beat the market on a risk adjusted basis”, a finding similar to Jack Bogle of the Vanguard Management Fund conclusion which effectively said actively managed funds luck runs out over time. Lorenzo Casavecchia from the Quantitative Financial Research Centre at the University of Technology, Sydney says that the number of fund managers who are able to outperform over long periods is close to zero. As for those that were able to add meaningful returns on top, forget it. Diana Clements in her article “Better to be a lucky monkey on Kiwi Saver front” quotes Sam Stanley head of Smart Kiwi “In the US, 67% of fund managers don’t outperform their indexes, they underperform them. A further element of questionable benefit is the regular practice of performance pay and bonus payments on top of salary. This is a problematic area with conflicting research but again weighted more to the negative conclusion that bonus payments are unnecessary. Bonus pay on top of a lower annual salary may have benefit, but with significant salaries already paid to fund managers, bonus payments are probably not justified. It’s worrying to see the New Zealand Super Fund paying large salaries to the CEO and investment staff, plus a bonus scheme in place.

A quick summary of all the opinions says a few genuinely brilliant managers may outperform the index, but it’s impossible to identify them in advance. The conclusions above are devastating for fund performance management, as they strike at the very heart of fee’s, and salary remuneration. Questions are starting to arise overseas about over- paid fund managers, and this parallels the emerging issue of excessive salaries being paid to company CE0”s, with little evidence to justify the ridiculous amounts. As Jacqueline Rowarth said in an earlier National Business Review article “Consideration of the value CEO’s are actually adding to the company appears to be absent “and Board governance on salary levels and reasonable reimbursement must be questioned. For the ordinary investor it’s an impossibility to gather simple and transparent information on fund performance, though to be fair improvements in this area are appearing e.g. www.sorted.org.nz. While some improvements in general may be emerging, my comment would be head towards passive funds, and low fees. Ignore claims of significant market performance, and steer yourself towards main stream funds, where volume might provide some protection. As William Bernstein an investment advisor and writer says “The purpose of investing is not to simply optimise returns and make you rich. The purpose is not to die poor”

Posted by Alec Waugh

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