Prior to the Global Financial Crisis, Paul and Laura approached us for advice regarding an industry fund. The particular fund, at that time, was showing outstanding returns, and journalists and ratings agencies were lavishing praise upon its ability to beat all competitors.
We had noted this performance previously, and are always suspicious, generally with good reason. Our experience has been that it is nearly impossible for one fund to remain consistently at the top. Quality fund managers themselves acknowledge this difficulty.
It is understandable that clients want the best. Therefore, if one fund displays much higher returns, why were we not recommending its use?
In December 2006, we had noticed an article in a national newspaper, where the “guru” who was responsible for the outperformance was being interviewed. He asserted that it was his belief that the superannuation funds should be able to nominate a return of 12.5% a year over time, mainly through the purchase of alternative assets such as property, infrastructure, private equity and collateralised debt (now known as junk bonds!)
His statements were backed by impressive performance, so why did we have reservations?
Incredibly, the guru went on to say “The underlying implication is to get the higher returns you have to assume higher risk. That is not our experience. We’ve had higher returns and lower volatility. It’s the Holy Grail that everyone is looking for.”
With that statement, we quickly realised that the guru was an incompetent. It therefore followed that we would not invest funds with this super fund or any of the others that were being advised by this person.
When the Global Financial Crisis occurred, the three very large funds for which he was responsible struck liquidity issues. The particular fund is now one of the bottom performers over the last 10 years.
There is no easy money in investment and our advice to Paul and Laura was to stick with proven managers that acknowledge the necessity of risk and are never arrogant about performance.