Experience only comes with time, but some investors have now been waiting a decade to be truly tested.
The 2008 financial crisis may be lingering long in the memory, yet the number of fund managers who actually ran money in its midst continues to dwindle.
Ten years on from the market lows, and that’s why some intermediaries say they find value in episodes like the fourth quarter of last year – sudden drawdowns can help indicate how their managers might fare in a more concerted slump. That said, plenty of problems might not emerge until the real thing arrives.
To examine the issue in more detail, I took a look at manager tenures on several hundred equity funds – specifically those most commonly used in wealth manager model portfolios.
In total, fewer than one in three fund choices were being run by their current managers in mid-2008.
Not too bad, you might say. But this headline figure is flattered slightly by UK funds, which make up just over a quarter of the total universe under examination. Maturity is more evident here: 43 per cent of managers have made the grade.
In contrast, managers of US, emerging market and global equity funds can count just one in five of their number as sufficiently experienced.
There might be some fuzziness in the data – overseas equity managers could have run non-Ucits versions of their portfolios prior to the current structures launching – but equally there may be other reasons for these findings.
It’s reasonable to conclude that model portfolio operators are aware of the tried-and-tested domestic equity managers, but that the search for diversification and differentiation abroad often leads both providers and buyers to seek out newer strategies. And history will ultimately judge only some of those choices to be correct.
At the moment, however, the more successful portfolios are falling foul of fund buyers just as much as their underperforming counterparts.
Analysis by sister publication Asset Allocator shows almost half of all funds exited by discretionary fund managers over the past 12 months had beaten their sector average in the year beforehand – and a third were in the top quartile.
This could be evidence of late-cycle thinking: wealth managers are either changing allocation decisions or simply taking profits on a top performer. But we should bear in mind a recent academic study analysing fund managers’ own decisions on when to sell. It found these decisions, in retrospect, were collectively worse than if they had sold stocks at random.
That’s food for thought when considering how to deal with managers who are outperforming.
What it says about the relative merits of experienced versus inexperienced fund managers is another question. The former group may have worked through previous crises, but do their long tenures make them more susceptible to the behavioural biases that still dog the industry?