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Fund managers better off throwing darts
Sunday Tribune 23rd December 2007 - Gary Mahood
If you had money invested in an Irish equities fund through 2007, there's a better than 50/50 chance you have paid for the privilege of losing money this year. Barring a remarkable final week turnaround in performance, 80% of funds that invest solely in Irish shares will underperform the overall Iseq for the year.
That means most of the companies investors pay to make informed decisions about buying and selling Irish stocks are doing worse than random selection. Fund managers who chose shares by throwing darts should, over time, arrive at roughly the average performance of the market as a whole. That is, about half would beat the market, while the other half would do worse. Yet incredibly only six of the 33 Irish equity funds on the market managed to outperform the Iseq index of Irish shares so far in 2007. If Irish fund managers are throwing darts, they must be doing it blindfolded, because there are a lot of losing players out there.
But it gets worse. Of the 26 funds with at least a three-year history, only one . . . Canada Life Irish Equity . . . beat the Iseq benchmark. The same is true when you go back five years, too: only Canada Life beats the 23 other funds with at least a five-year history. Considering the beating the Irish market has taken in the second half of 2007, funds that invest solely in Irish shares should be in trouble right now. But while the Irish market is sinking in the toilet, Irish equity funds are slipping out the waste pipe and into the sewer.
And it's not just an unusually volatile 2007 that has the funds in the dumps. The average annual return of the funds with a three year history is only 5.92%, while those with a five-year history have achieved only 11.17%. Not an impressive performance and not the average returns we would expect. After all this is the home market of these fund managers. In fairness this year has been exceptionally bad for Irish equities. The Iseq index of Irish shares is down over 22% in 2007 and is about 30% off highs achieved in February and June . . . right before the sub prime chaos erupted. But between 1970 and 2006 the Iseq produced a real return after inflation of just over 10% per year. Apart from the oil crisis years of 1973 and 1974 when it lost 25% and then 56% in real terms in consecutive years, the Iseq has run like a bull.
So why can't Irish fund managers ride it without falling off? Irish-only funds are nursing saddle sores right now because the Iseq bucks so hard in challenging market conditions. The Iseq index of Irish shares is very concentrated on a few companies, with 10 companies making up 82% of the index. Significantly, more than 40% of the index's value is comprised of just four banks. With valuations of banks well down globally because of the sub prime mortgage crisis in the US, the Irish market gets hit especially hard. So while a unit linked fund spreads investments over a diversified range of shares, the Iseq's range isn't that wide with so few types of equities to choose from on the Irish market, investment protecting diversity is hard to come by.
A few bad bets can knock a fund right out of the saddle. Nevertheless, probability dictates that a fund should hit as many swings as roundabouts. Yet even in developed efficient markets you cannot judge the future performance of a fund from its past historical performance. Choosing a fund that will beat the market in the future is an impossible task. An investment style may perform better than the market over five years, then to underperform the market in the following five years. So while the actively managed Canada Life has been the best performer over three and five years and number two for 2007, there's no telling today how it will perform tomorrow (although in the net fund category it is the best performer over 10 years, too). In a falling market in 2007 the fund has managed to beat the benchmark by an impressive 7.6%. Perhaps there is something to active management after all.
There is only one thing certain about investment funds and that is costs. Sales commissions and monthly policy fees or bid offer spreads on buying and selling units have a further drag on investment returns. In other words your money may never get into the fund in the first place. (This is not measured in the accompanying table. ) The two cheapest funds which invest in the Irish market . . . from QUINN-life and www. saveandinvest. ie . . . are not surprisingly execution only. Both of these funds have only a 1% management charge and no other charges such as a bid offer spread or a monthly policy fee.
QUINN-life Celtic Freeway invests in the 20 largest companies in the ISEQ. These 20 companies may under or outperform the ISEQ index in the future, although they are more or less the Iseq itself, much like the Iseq 20 exchange traded fund. Celtic Freeway has a 1% management charge and all your money will be invested.
Saveandinvest. ie sells an actively managed Eagle Star Irish Equity fund. It seeks to maximise capital growth through a diversified portfolio of Irish equities. Again this may underperform or outperform the ISEQ index in the future. The fund has a 1% management charge and all your money will be invested. To buy into either of these funds the consumer must have done their own research, be happy taking the riskinherent in the fund in pursuit of higher returns, understand that investing directly in the Irish market is for them and want to buy the product without advice. All that can come with costs of its own, of course.
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