Lessons From The Past?

By Mary Holm

Monday 28th May 2001

Fund managers are going to hate me for saying this. But a look at the numbers in a recent publication could lead you to believe it doesn't much matter which manager you invest with.

The publication is The Aon Investment Update. Every quarter, it gathers returns from 15 New Zealand fund managers.

The first table in the Update lists the managers' returns on balanced funds, which hold a combination of New Zealand and overseas shares, bonds and property.

It includes only funds in which the manager has full discretion over which shares and mix of assets to invest in. In other words, if the fund does well or badly, the manager deserves the credit or blame.

In the less-than-stunning investment year ending March 31, the best performer was Tower Asset Management, with a return of 5.2 per cent (before tax and fees, as are all returns in this article)

The worst performer was Armstrong Jones, with a return of minus 6.2 per cent.

That's quite a range. And the variation is probably largely because different fund managers use different investment styles, particularly when selecting shares.

Some, for instance, are "value" investors, basically seeking shares that are cheap. Others are "growth" investors, looking for shares that seem likely to continue to grow.

Last year, value managers did well. In the couple of years before that, growth was king.

"We can still hear the value managers saying 'We told you so'," says the Update, "while the growth managers grit their teeth as they have to face trustees who aren't thrilled at the negative returns that they are soon going to have to disclose to their members."

The article adds, though, that "what is perhaps really interesting is the very similar results that the managers have returned over three years, irrespective of style."

The three-year balanced fund returns range from 6.6 per cent to 10.8 per cent a year, with many clustered around 8 per cent.

Over five years, the story is similar. The range is 8.9 per cent to 13.0 per cent, with most around 11 per cent.

That's not to say a few percentage points don't matter. If you invested $100 at 8.9 per cent a year for five years you would end up with $153 before tax and fees. At 13.0 per cent, it would be $184.

But the three-year and five-year ranges of returns are much narrower than the one-year range. Clearly, different funds have excelled in different years.

It's also interesting to note that:

- Last year's worst performer had a five-year average return of 11.0 per cent. For the best performer, it was 11.3 per cent. Nothing in it.

- The five-year winner, NZ Funds Management, has the most volatile balanced fund.

Over the long term, we expect a more volatile fund to get higher average returns. But they often have a rough ride along the way.

In the year ending March 31, for instance, NZ Funds Management was third worst performer out of 14.

All of which makes you wonder about fund selection.

If you invest in a fund because it has done well over the past year, you could go badly wrong.

Over five years, managers get more chance to show their stuff in a variety of markets. But what do you do if the five-year results are all similar?

They won't always be, of course. But even when they're not, the winners might have got there more by luck than ability.

And who's to say a manager will continue to do what they did over the last five years, anyway?

For the ordinary investor, data on past performance is pretty useless.

Mary Holm, a freelance journalist and author of "Investing Made Simple", is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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