By Kamil Maharajh, 11 January 2016
Given the nature of the investment environment, more and more investors base their financial decisions on past performance. Switching from funds that have performed poorly to the top performers in a short period may not always be a prudent strategy. Investors need to understand that short-term performance should not be the sole purpose to invest in a unit trust. To improve their chances of success they must be willing to sit through volatile markets and avoid the ‘thrill of the chase’.
In the first study conducted in the SA Multi-Asset Income and SA Multi-Asset Low Equity funds, I found evidence that buying and holding a fund managed by a quality asset manager outperformed chasing strategies over various holding periods. I now move up the risk spectrum and have a closer look at the SA Multi-Asset High Equity funds to test whether this conclusion is still applicable.
I conducted this study for the SA Multi-Asset High Equity category for the 10 years ending 2014. I started in 2004, working through each year’s performance data, incrementally picking the best performer from the previous year and then investing for the current year, doing this over and over for 10 years. I then also implemented a two-, three-, four- and five-year holding strategy for each fund before switching to the best performer. We are therefore chasing the best past performers. I then compared each of these to all available funds which we could have invested in for the entire 10 year period.
This is a summary of the strategies I will be referring to in this paper:
These simulations were conducted following two scenarios. The first scenario began with the best performing fund outright while the second scenario began with the same fund that was being compared to the buy and hold strategy’s value. These values were then compared to the buy and hold values to demonstrate which strategy would have given a higher return over the 10-year period.
In the SA Multi-Asset High Equity space there were 23 funds with at least a 10-year track record that existed in 2004.
These are the funds and their annual performances in 2004:
On a qualitative basis there were at least seven funds that could have been selected to invest in for the 10-year period (Buy & Hold). For illustrative purposes of this study the Foord Balanced fund was selected. I then began 2005 by investing R100 000 in the Investec Managed fund, as it was the best performer in 2004. In 2005, the best performing fund was the Foord Balanced fund, which I then selected as my 2006 investment. I continued this same selection process for each year until 2014. I compared scenarios using one-, two-, three-,four- and five-year holding periods before switching to the best performing fund in each of the chasing strategies.
By the end of the 10-year period, if we bought and held the Foord Balanced fund, the investment would have grown to R472 979.63 @ 16.8% p.a.
Below is a summary of the Foord fund’s accumulated 10-year value compared to each of the Chasing strategies -which selected the best performing fund outright before switching to the best performing fund after each of the five holding periods:
The Buy & Hold strategy, using the Foord Balanced Fund, would have outperformed all five chasing strategies by quite a margin, as is indicated in the third column (Foord Balanced fund’s accumulated 10-year value divided by each chasing strategy).
I then compare the Foord Balanced fund’s accumulated 10-year value to each of the chasing strategies – where the Foord fund was also chosen initially before switching to the best performing fund after each of the five holding periods:
We are again able to see that, despite the mild underperformance against the Chasing 2S and 4S strategies, the Foord fund is still able to outperform the chasing strategies on a cumulative basis, as is indicated in the third column (Foord Balanced fund’s accumulated 10-year value divided by each chasing strategy).
Below I have compiled two graphs which compare each of the fund’s accumulated 10-year values to each of the chasing strategies, stacking them cumulatively.
The above graph compares each fund’s buy and hold strategy to each of the chasing strategies where the best fund was selected outright, stacking them cumulatively. We are able to clearly see that buying and holding a quality asset manager’s fund will outperform chasing strategies most of the time.
The above graph compares each fund’s buy and hold strategies to each of the chasing strategies, which began with the same fund as was chosen in the buy and hold strategy, stacking them cumulatively. We again see that buying and holding a quality asset manager’s fund will outperform chasing strategies most of the time.
Throughout this study, we have again found clear evidence that investing for the long-term will almost always reward an investor more than any form of chasing strategy that attempts to chase past, short-term outperformance. The skill of a quality asset manager should be able to outperform markets over the long-term. Therefore, we are able to see that there is undoubtedly merit in selecting a good asset manager, on a qualitative basis, and buying and holding investments for longer periods in order to achieve the best performance from an investment strategy.