The onset of the Rugby League & AFL finals series provides a nice reminder of some analogies between sport and the world of investing.
Most sport commentators and our own discussions focus on the star players and coaches. And with good reason, they play a huge part in the success or otherwise of a team. However ,it is also the one percent efforts of players that can turn a game or lead to the slightly better outcome. That extra effort to make the tackle or put off the opposition. In tight competitions these "one percenters" can make all the difference between winning and losing.
So to in the investment world. However in this world the start performers are the asset classes you hold in your portfolio (not the supposed star investment manager)s. Whether you invest in defensive or growth assets, cash or fixed interest, Australian shares or international shares, developed or emerging markets. The research suggests that this decision directs 95% of the final outcome. This is where the big differences are made.
However there are also the "one percenters" when investing. In particular, how much effort does the investor take in reducing the costs brought about by reaching the target asset allocation through taking care with trading can make a reasonable difference in the scheme of things.
This afternoon I have been to an information session put on by Dimensional Fund Advisors. Part of the session discussed the processes taken by Dimensional to minimise trading costs, these being both the explicit cost such as brokerage and taxes and also the implicit costs created through buy/sell spreads and market impact created through trading. (Market impact refers to the phenomenon that when trading large amounts you can tend to move the market against you - when you sell this drives prices down and when you buy it drives prices up.)
These implicit costs are difficult to measure and we need to be careful quoting any data as gospel but Dimensional provided data from an external monitor which suggests that their approach has provided a 0.65% better result compared to the median manager trading in Australian equities.
We need to sit back and remember that these trading costs make up a very small part of the overall end return for an investor, especially when your approach involves minimal amounts of trading such as our's. Asset class is still the main game but knowing that you team is going the extra yards to follow through with the "one percenters" provides further evidence that they are doing their very best to provide the best outcome.
If you want more information about A Clear Direction's approach to building investment portfolios with the help of leading fund managers like Dimensional please take a look at our Building Portfolios page or get in touch directly - firstname.lastname@example.org
The latest semi-annual Standard & Poor's Index Versus Active Funds (SPIVA) scorecard for Australia has been published and does not provide any better news for active fund managers. The key findings were:
For the 5 years to the end of June, more than 60% of all active funds underperformed relative to their benchmarks.
The S&P ASX200 has outperformed approximately 65% of active Australian equity funds over the 5 years. (72% over the past 12 months)
70% of Australian equity small-cap funds out-performed the S&P ASX200 Small Ordinaries (Our preferred Dimensional Small Company Trust beat this index by 4.40% over the 5 year period.)
Over a 5 year period the MSCI World ex Australia index has outperformed more than 77% of actively managed funds. (57% over the past year.)
The S&P ASX 200 A-REIT index has outperformed more than 62% of active A-REIT funds over the past 5 years. (Outperforming 88% of active funds over the past year.)
Yet again the evidence clearly shows that active managers fail to outperform. To read the full report please click on the following link - SPIVA scorecard.
An article published on Financial Standard today highlighted research contained in the CMC Markets Share Trader Insight Survey that showed investors had difficulty timing market entry and exit in the 6 months to July 2010. These results were based on the flow of cash which tended to flow into equities when the market was at its peak and flow out when the market was at a trough. The exact opposite to what an investor should be doing.
This actually comes as no surprise. Each year we keep an eye on the Quantitative Analysis of Investor Behavior report published by Dalbar Inc. This report looks at investor performance in the USA based on fund flows. The report has consistently found that over the long term, investors have achieved a much lower return compared to the relevant benchmark for an asset class. The latest report ,looking at the period up to the end of December 2009, found that over the previous 20 years investors have achieved a combined average return of 3.17% per annum from investing in US equities whereas the S&P500 over the same period has provided a return of 8.20% per annum. i.e. investors on average have under-performed at the rate of 5.03% per annum.
The reason for this under-performance can be put simply down as investors poorly timing entry and exit from the market, i.e. buying high and selling low.
The Dalbar report this year did contain some good news. Average investor returns for the one year were 32.20% compared to the S&P 500's 26.45%. Maybe investors in the US are now much better at getting in and out of the market. Somehow I doubt it.
The CMC Markets Share Trader Investor Survey provides timely reminder that an active approach to timing markets is extremely difficult.
At A Clear Direction we think that a much better way is to build structured portfolios for the long term and avoid the pitfalls of trying to time the market.
One of the risks often overlooked by active investors is the key person risk. This is the risk that the key person or people behind the investment approach leave the company who are managing your money. It is also a risk for DIY investors, the risk being that you suffer an ailment or illness which leaves you impaired from making sound investment decisions.
An example of that risk is being dramatically covered in today's media in relation to the 452 Capital fund management business. In what appears to be a tragic set of circumstances the management of this high profile investment firm has all but disintegrated. Refer to Elizabeth Knight's article published by the Sydney Morning Herald - Next step uncertain for 452 Capital.
This must provide a lot of uncertainty for investors in funds offered by 452 Capital.It also reminds all of us about the key person risk when applying an active management approach to investing.
The approach favoured by this firm takes this risk off the table.The investment approach we recommend our clients use is not based on a key person or team of people deciding which companies to invest day by day.Instead, the managers we favour apply whole of market approaches based on well tested academic research.
If you are interested in finding out more about this approach please take a look at our Building Portfolios page or get in touch to request further details.
Users of our website, through our User Voice feedback forum, have requested that we regularly update the graphs outlining the performance of the Dimensional trusts that we use in building portfolios for clients. In response to this feedback we have updated these graphs to reflect performance up to the end of July 2010.
The graphs show a strong month of returns for all asset classes however returns have been impacted by the difficult conditions experienced in April, May & June of this year.
Over the long run, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist:
Australian Share Trusts - 7 Year returns
7 Yr Return
to July 2010
Premium over ASX 200
ASX 200 Accumulation Index
Dimensional Australian Value Trust
Dimensional Australian Small Company Trust
International Share Trusts - 7 Year returns
7 Yr Return
to July 2010
Premium over MSCI World (ex Australia) Index
MSCI World (ex Australia) Index
Dimensional Global Value Trust
Dimensional Global Small Company Trust
Dimensional Emerging Markets Trust
NB - These numbers are average annual returns for the 7 year period which are slightly higher than the annualised returns.
For anyone new to our website, it is important to point out that we build investment portfolios for clients based on the best available academic research. Take a look at our Building Portfolios and Our Research Based Approach pages for more details. In our view, this research compels us to use the three factor model developed by Fama and French. In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (www.dimensional.com.au). We do not receive any form of commission or payment from Dimensional for using their trusts. We use them because they provide the returns clients are entitled to from share markets.
However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research. Therefore, we like to provide the historical returns of the funds that we use to build investment portfolios.
Please let us know if you have any feedback regarding these graphs by using the Request for More Information form to the right or via our User Voice feedback forum.
Over the past few months our financial education consultant, Scott Francis, has been busy contributing articles to Alan Kohler's Eureka Report. Unfortunately our website administrator (yours truly) has not been so conscientious getting the articles uploaded on to our website. This has now been rectified. Scott's latest articles have included:
1: Making tax considerations drive your investment strategy
2: Parking money in managed funds
3: Attempting a “wash sale”
4: Deductions that don’t match your personal situation
5: Putting too much in super
6: Putting too little in super
7: Squandering tax cuts
8: Failing to claim for charitable donations
9: Not claiming the $1000 tax exemption for employee share programs
10: Failing to get organised
Please click on the links to be taken to the full articles.
It is understandable that many investors may be feeling a little uneasy at present. Markets continue to be volatile, up strongly one month and down the next. The big issues we tend to be focusing on are European debt, austerity measures in Europe to reign in the debt, the sluggish US employment numbers and worries about a double dip, and Chinese government efforts to slow down growth to help manage possible asset price bubbles. Just writing this causes me to want to take a tablet and have a lie down.
One set of data that does not seem to be getting the same airtime from the financial media are earnings being generated by local and international companies.The recent US reporting season has been strong and in part helped global markets along through July and early August. In the end it is the earnings generated by companies that provide a return to long term investors and should be a key consideration when investing.
A report in today’s Australian Financial Review written by David Bassanese – “US growth will avert earnings slump” – provides some interesting data about the earnings reported in the US.Bassanese outlines that price to forward 12 month earnings (i.e. forecast earnings) for the US S&P 500 is sitting around 12.3, 23% below its 10 year average of 16.Longer timeframes suggest the average ratio is more like 15 times forward earnings.Either way this simple statistic suggests that US share prices are good value at present levels.This might well be because share prices are factoring in the chances of future economic head winds and is not in itself a signal to buy, buy, buy, but it does suggest that if you have a long term window, buying assets now could provide you with access to a well priced earnings stream into the future – what should be the key focus of a long term investor.
Unfortunately price to earnings ratio do not provide an accurate buying guide.The ratio could fall further and company earnings could falter for instance if the US economy falls into another recession.However it provides a glimmer of hope in what seems to be a doom and gloom story in the media.
So is now the time to buy or sell?
As always, our firm’s approach is not to try to time markets but rather structure portfolios for the future, keeping enough aside in cash and fixed interest to at least cover the next 7 years of income requirements and then spread the remaining assets across a diversified portfolio of Australian and international shares including listed property.Those who, after taking their individual needs into consideration, have the capacity to invest regularly over time, now is still a good time to be making these investments.