Track records could be misleading investors
Australian fund managers with an excellent investment track record could be misleading investors by overstating their investments skills, according to research from London-based investment skills consultancy Inalytics.
According to findings from the firm, once a fund managers’ decision to be underweight in listed Real Estate Investment Trusts (REITs) is factored in, the fund’s performance is no better or worse than their overseas counterparts.
“When we first did the numbers, it revealed that two thirds of Australian managers outperformed their benchmark,” said Rick Di Mascio, chief executive officer at Inalytics. “This is a remarkable result by any standard but the fact that most of this outperformance can be attributed to fund managers being underweight in REITs certainly takes the gloss off their performance in terms of key measures of investment skill,”
Information for the research, which was provided by fund managers and superannuation funds, came from a cross section of 62 portfolios representing just over half the industry. It found that 42 of the 62 long-only portfolios outperformed the Australian Securities Exchange between 30 April 2006 and 31 December 2010.
Di Mascio explained the reasoning behind the analysis was to separate the positive decisions to hold or overweight a stock from the decisions to underweight a stock. He added that on analysing the Australian Equity Domestic Peer Group results it was noted that instead of the usual normal distribution of over and under weights at the sector level, all except two of the sample 62 managers were underweight in the REITs sector throughout the period of review. This added, on average, about 261 basis points (bps), out of a contribution of 289 bps from all underweight positions, to the performance of the funds in the sample.
“What makes these results interesting is that many of these fund managers are charging performance fees for beating the index. Yet their results are not based on good stock selection, but on a decision to be underweight in one industry sector,” Di Mascio added.
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