OpinionOct 24 2014

We need to do away with quartile rankings

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Bragging rights are always claimed by managers when their funds are top quartile in this timeframe or top decile in such-and-such a period.

Of course, this is an achievement as the manager has outperformed and, arguably, it is only fair this is celebrated. After all, what is active management otherwise.

Equally, it is only right that the press - as fund groups are reticent to trumpet it themselves - spot when a manager has hit a patch of underperformance against peers or lost money.

But is this gladiatorial, my fund is better than your fund business, all a little outdated?

Rathbones’ chief executive, Mike Webb, believes there is a trend towards risk-targeted funds, which by their nature do not aim to beat peers.

Instead they are designed with a risk budget and usually the goal of beating a ‘cash-plus’ or ‘inflation-plus’ target. Essentially, this means producing a real return for investors.

Now, of course, Mr Webb has an interest in saying risk-targeted is the next best thing because his retail multi-asset funds are risk-targeted.

But the fact he said he had been lobbying the fund management trade body, the IMA, to create a sector to house such funds in, while arguing he would ban quartile rankings from such a sector should it be created, was interesting.

This was partly because of the difficulty of selecting one measure to pit these funds against, but when asked to elaborate he suggested there was a “danger” in buying any fund just for its returns given this was just “half the equation”. He said that historically this “hasn’t led to properly constructued portfolios”.

At present the three funds run by Rathbones’ David Coombs are in the IMA Unclassified sector - a choice made by the group so they are not compared to other multi-asset funds.

Mr Webb said advisers should be analysing funds for a multiude of factors, such as how returns have been generated, are those returns sustainable, is the business a stable one and is it well resourced as opposed to how many rivals has it beaten.

“It is at that level [funds should be considered] rather than going to look at the past three months and seeing if it has beaten the competition,” he said.

“It is a different way of looking at funds.”

While the discussion focused on multi-asset funds, I would argue the service quartile rankings have performed is no longer needed in any sector.

Mr Webb added the compulsion of retail investors and potentially some advisers to back a fund after a top-quartile, one-, three- and five-year period was an issue.

“It is seen as an obvious buy but the institutional market would say it is time to sell,” he said.

Mr Webb acknowledged fund selection is improving and the adviser industry is becoming more professionalised but the persistent obsession with who has beaten whom ignores what end clients most likely care about - have they made gains or not.

The aim of beating others is not a considered investment strategy.

This is not to say performance doesn’t matter. Performance is king and will rightly remain so - but the way we look at the king needs to change.

Bradley Gerrard is news editor at Investment Adviser