Why have these guys been consistently so lucky?

[tjh290633]

Now you are back to the Johnson Fry Worst Performing Fund "bond", which did what it said on the tin.

TJH

[GeoffF100]

Now you are back to the Johnson Fry Worst Performing Fund "bond", which did what it said on the tin.

Yes, you are right. They would have been much better off buying a low cost tracker, if one had been available.

The lowest cost retail funds available at the time were the large Investment Trusts. Foreign & Colonial would have been a reasonable proxy for a world tracker. I expect that did a lot better than the WPF.

The WPF had two layers of huge costs. It also invested in a statistical outlier each year, which resulted in a huge variability in returns. It did very well before anyone bought it, in back-testing (as these funds always do), despite the costs, but did very badly when the mugs bought it.

[Bubblesofearth]

Another link offering no stats. If you know the total number of funds and the variance then you can get to the significance of the performance data. Without that information it's impossible to say anything about whether it's likely to be chance or not.

There is also an issue of data mining which even the above statistical analysis would not properly address.

BoE

[XFool]

And, back on topic, if beating the market consistently is pure chance or sheer luck, how come these people have done so consistently for the last ten years and in several cases, considerably longer than that? How long can you be lucky? How long can sheer chance run in your favour for?

Somebody's got to be "lucky"? And somebody's got to be unlucky...

Question is:

How much is it just a matter of luck?

And the killer:

How can you tell who is going to be "lucky" - in advance?

[XFool]

I can't quote the research (on phone and tablet, and beer) but in the case of managed funds past performance is a poor indicator of future performance - no better than random in most cases.

That is indeed the present conventional wisdom. But why did it not apply to these people 5 years ago? And why should it apply now? How come Giles Hargreaves has been so "lucky" over a couple of decades? Why does the present conventional wisdom not seem to apply to him? (Disclosure, I have had investments in his Special Situations fund for almost all of those two decades. I would feel pretty stupid if I'd listened to conventional wisdom and bought a tracker instead. Wouldn't I?).

But have you asked the other guy? The one who bought the loser fund.

"conventional wisdom" doesn't claim nobody wins, anymore than it claims nobody loses. It says, in effect, "How can you predict this in advance?" And answers this by saying: "You can't."

Mind you, Warren Buffet gave another answer in his forward to Ben Graham's 'The Intelligent Investor'

So I guess you "Pays your money..."

[XFool]

Please explain why your "truth" does not appear to apply to the people in the article then.

It does apply. Think about it in terms of tossing a coin. Someone who has tossed 5 heads in a row is no better at tossing heads than anyone else and the next toss can go either way irrespective of tossing track record. The distribution of returns from actively managed funds matches well with the distribution to be expected if results are purely random.

Not sure this is conventional wisdom by the way. Most money is still actively managed, particularly so when it comes to retail funds. Alternative approaches such as pure indexing and quantitative "Factor" or "Smart Beta" are still minority pursuits, just not as niche as they once were. The pursuit for skilled tossers goes on.

Thanks for the thoughts but I have to say, I don't find the analogy of coin tossing too convincing to be honest. I understand that most active managers fail to beat an index, but the solution to that is not to use them.

Indeed. A bit like the way to make money at the races is never to place bets on losers, only bet on the winners. Easy!

And when it comes to the lottery, put down the WINNING NUMBERS. It never fails.

I must be doubly lucky, lucky once that I pick lucky managers and lucky twice that those managers continue to be lucky. In the case of Hargreaves, lucky for two decades.

Well, the 'smart money' would only bet on the winners. So, either you are smart. Or you were just lucky!

The big question is: Are the results of winners simply random (lucky) or dues to some skill. It seems very hard to establish. Also, one person's 'skill' might well work in some markets or in some investing periods, but not in another.

Look at Woodford.

P.S. Got any tips for next weeks lottery?

[Backache]

Sorry, I have to say, you're a mile away from the truth there in my opinion. There are thousands of funds to choose from. Most of them underperforming an index. Of course, I do not buy those manager's funds. I only buy the "lucky" managers. The more money that goes into index trackers, the more opportunities there are for the Hargreaves, Smiths, Trains of the investment world to make good money.

Not sure that this is accurate successful active managers don't make money at the expense of trackers, they make it at the expense of less good active managers.
If the Index return is x and the passive managers return is x and the successful fund managers return is x+y the manager is making it at the expense of the investors making x-y not those making x.

[AleisterCrowley]

Normal distribution - it would very odd if there weren't some consistent outperformers - matched by consistent underperformers on the other side.
Doesn't mean that your fund managers are JUST lucky, but it's difficult to prove they have an edge.
The importance of luck is illustrated by the fact that past performance is a very poor predictor of future performance.
Take a pro footballer - if he scores regularly over three seasons it's reasonable to expect a 'similar ' performance next season, as he clearly has a high skill level.
Then take a 'coin tosser ' who has flipped heads 50 times in a row. The chance of a head on his next flip is still exactly 0.5
The performance of managed funds suggests they are closer to the latter than the former.

[colin]

FredBloggs wrote
I have had investments in his Special Situations fund for almost all of those two decades.

How did you know 20 years ago that that particular fund, among all the others that were available to you at the time,would do so well over such a long period?

[hiriskpaul]

I have no issues in reversing a poor decision. But the trouble with waiting for a turn round in performance is that you may have been better invested elsewhere while you wait. The present under performance for example by Woody, when will it turn round (assuming it will)? Nobody knows. Meantime, put your money elsewhere while you wait. Taking the point a little further, if you do not want to invest in historically high performing managers, then invest in poor performers and hope they come good in the end. Doesn't sound so convincing either, does it?

Actually a contrarian approach can work well. As a recent example I bought into JP Morgan Smaller Companies in Jan 17 after a soft patch, with the shares sitting on a discount to NAV of 19% at that time. Since then the share price has risen over 50%.

[colin]

Hiriskpaul wrote
It is not that fund managers are not skilled at what they do either. Skill levels have never been higher.

yes if fund managers as a whole were unskilled economic growth from listed companies would not exist as the bad fund managers would destroy too much wealth by throwing it at companies destined to fail, but on the whole that clearly does not happen. but knowing that doesn't help me pick one single fund manager destined to outperform the general market over the next 20 years.

[hiriskpaul]

Sorry, I have to say, you're a mile away from the truth there in my opinion. There are thousands of funds to choose from. Most of them underperforming an index. Of course, I do not buy those manager's funds. I only buy the "lucky" managers. The more money that goes into index trackers, the more opportunities there are for the Hargreaves, Smiths, Trains of the investment world to make good money.

Not sure that this is accurate successful active managers don't make money at the expense of trackers, they make it at the expense of less good active managers.
If the Index return is x and the passive managers return is x and the successful fund managers return is x+y the manager is making it at the expense of the investors making x-y not those making x.

Not quite true since cap weighted index trackers are not the only passive funds. There are also factor funds, smart beta funds, high yield index trackers, etc. that do not have fund managers. There are also private investors who invest directly in the market. So if a fund manager has made x+y, one or more of these other alternatively weighted portfolios, without a professional fund manager, could have made x-y. There is no evidence that this is the case though! Active funds managers do not appear to be making gains at the expense of smart beta, etc. or private investors. This may have happened in the post though when a lot more of the market was held by private investors.

[tjh290633]

Hiriskpaul wrote
It is not that fund managers are not skilled at what they do either. Skill levels have never been higher.

yes if fund managers as a whole were unskilled economic growth from listed companies would not exist as the bad fund managers would destroy too much wealth by throwing it at companies destined to fail, but on the whole that clearly does not happen. but knowing that doesn't help me pick one single fund manager destined to outperform the general market over the next 20 years.

I don't think that investment decisions by fund managers have any effect on economic growth of listed companies. There are many other factors which have more effect.

TJH

[gryffron]

I don't think that investment decisions by fund managers have any effect on economic growth of listed companies.

It must have some effect. Companies with over inflated share prices (e.g. Google, Tesla) are able to expand or cheaply swallow up competitors with massive rights issues. Companies with depressed share prices will struggle to borrow and invest.

Gryff

[tjh290633]

I don't think that investment decisions by fund managers have any effect on economic growth of listed companies.

It must have some effect. Companies with over inflated share prices (e.g. Google, Tesla) are able to expand or cheaply swallow up competitors with massive rights issues. Companies with depressed share prices will struggle to borrow and invest.

Gryff

It's not share price but cash flow that determines what companies can afford. Depressed share prices usually reflect struggling companies. The share price only shows what the market thinks of the company's prospects. Fund managers may decide to buy them in the hope of recovery. Some funds, of course, specialise in such situations.

TJH

[mc2fool]

Companies with over inflated share prices (e.g. Google, Tesla) are able to expand or cheaply swallow up competitors with massive rights issues. Companies with depressed share prices will struggle to borrow and invest.

It's not share price but cash flow that determines what companies can afford. Depressed share prices usually reflect struggling companies. The share price only shows what the market thinks of the company's prospects.

No, the share price (or, more precisely, the market value of the company) determines how much the company can raise in a rights issue or placing, for a given % of ownership, when it wants/needs to fund expansion that way. A higher price is also better for share-for-share swap takeovers, and the covenants for commercial loans (from banks to the company) will often have market cap floors in them.

So, Gryff is right, ceretis paribus, a company with a higher price will find it easier (and cheaper) to raise and/or borrow money for expansion & investment (beyond what that can be funded directly out of cash flow).

[colin]

No, the share price (or, more precisely, the market value of the company) determines how much the company can raise in a rights issue or placing, for a given % of ownership, when it wants/needs to fund expansion that way. A higher price is also better for share-for-share swap takeovers, and the covenants for commercial loans (from banks to the company) will often have market cap floors in them.

Yes ... so the share price is set by how keen or not fund managers (among others) are to buy the shares, but fund managers are heavily influential throughout the life of a listed public company. New companies must raise capital to do anything, debt is useful but too much is dangerous so companies look to fund managers to provide the seed capital at the IPO, later when they find opportunities to expand or get in deep do do and need bailing out again they look to fund managers to provide large amounts of capital quickly and if they don't seem capable of climbing out of the proverbial and are facing the end of days it's the less risk averse fund managers who short sell.

Fund managers must be hugely influential to how the entire universe of listed companies evolve and to how technological developments and social developments permeate through society, just think of alternative energy projects , social housing and build to rent , company executives and technical people have the ideas but without fund managers they don't have the money to make their ideas reality.

[Backache]

Not quite true since cap weighted index trackers are not the only passive funds. There are also factor funds, smart beta funds, high yield index trackers, etc. that do not have fund managers. There are also private investors who invest directly in the market. So if a fund manager has made x+y, one or more of these other alternatively weighted portfolios, without a professional fund manager, could have made x-y. There is no evidence that this is the case though! Active funds managers do not appear to be making gains at the expense of smart beta, etc. or private investors. This may have happened in the post though when a lot more of the market was held by private investors.

True when I was saying trackers I was referring to cap weighted trackers. I must admit I regard smart beta and all these other alternative 'passive funds' As active funds who use an algorithm for determining how they are active.

[Lootman]

when I was saying trackers I was referring to cap weighted trackers. I must admit I regard smart beta and all these other alternative 'passive funds' As active funds who use an algorithm for determining how they are active.

Another way of thinking about it is that passive funds are rule-based or idea-based.

Cap-weighted trackers can then just be seen as one form of rules-based investing, where the rule is "follow index X (cap-weighted or otherwise)". The rules can be defined to any level of detail you like, as long as they can be expressed as some form of index that can be replicated.

Put another way, particularly with ETFs, you can play just one high-level investment idea, e.g. "invest only in companies with a market cap of over one billion that have performed share buybacks in every one of the last five years"

Passive investing is where you invest on the basis of high level ideas rather than manual share picking. The role of the individual manager becomes mostly redundant.

[colin]

Freddbloggs wrote..
Either -

a) I did my homework on the manger and his portfolio
b) I was lucky

Take your pick of the two. Just to point out though, had you seen Hargreaves' track record ten years ago, then invested, you'd still have enjoyed the next ten years of out performance. But that's just being lucky, right?

Why did you not just put all your money into Hargreaves Special Situations fund and leave it there?
Why do you not hold this fund today, by your reasoning past performance seems to be a good indicator of future performance, or has Hargreaves not done so well recently?