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In 2008, during my first year as a reporter for Investors’ Chronicle, I had an interesting encounter with an investment manager. He tried to convince me that a fund of funds, which is a portfolio of other funds, would outperform a fund that directly invests in securities like shares and bonds. This was in response to my criticism of the high fees and mediocre performance typically associated with these funds of funds.
He showed me a graph demonstrating the outperformance of funds of funds compared to “ordinary” funds. However, I pointed out that while there was one period on the graph showing outperformance, the other period did not. Despite my valid argument, the investment manager became angry, and I felt it was best to leave the conversation. Unfortunately, I had to abandon my excellent hot chocolate due to his spittle contamination.
Fast forward 15 years, and it’s disheartening to see that we still need to approach graphs showing “outperformance” with caution. This applies not only to prospective clients of wealth managers but also to journalists.
Wealth managers not only offer various services and perks to potential customers but also emphasize their investment performance. They often boast about being in the top quartile, meaning they are among the top 25% of performers in their peer group of managers with similar investment portfolios. It seems like almost every wealth manager claims to have winning funds.
Now, these are regulated products, so wealth managers cannot outright lie about their performance. However, they can cherry-pick data and use different criteria to present themselves in a more favorable light. Asset Risk Consultants (ARC) recently conducted a thorough analysis, revealing that up to 94% of wealth managers can claim top-quartile performance by manipulating the data.
ARC’s analysis demonstrates how fund managers can swing the data in their favor using different strategies. This highlights the importance of understanding the exact performance being presented, especially for private clients and their advisors.
ARC analyzed the performance of discretionary managers in the ARC Private Client Indices (“PCI”) Sterling Steady Growth risk category. Their findings showed that over a given period, more than half of any peer group could demonstrate top-quartile performance. This is because investment managers have flexibility in choosing time periods for performance calculation, allowing them to present a more favorable outcome.
For example, ARC looked at one, three, five, and ten-year performance data to June 30, 2023, and found that 40% of contributors could claim top-quartile performance for at least one of these time periods. However, some managers may perform well in one period but poorly in others, and it’s the long-term performance that truly matters.
Additionally, fund managers can manipulate the reporting periods by selecting different end dates, creating different performance pictures. The analysis revealed significant differences in three-year figures to June 2023 compared to the three years ending in December 2022, primarily due to the effects of the COVID-19 pandemic.
By varying the reporting periods and showcasing specific investment solutions, a majority of discretionary managers can present themselves as top-quartile performers.
It’s essential to closely scrutinize the data and ensure that the sales pitch aligns with reality. When considering an investment manager, ask about the proportion of clients following the same investment mandate being presented.
While wealth managers can’t deceive you, it’s crucial to be aware of the strategies they use to present themselves favorably. As investors, we should always demand the most up-to-date and accurate information before making financial decisions.
Moira O’Neill is a freelance money and investment writer. Find her on Twitter @MoiraONeill and Instagram @MoiraOnMoney, or contact her via email at moira.o’[email protected]
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