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08 Oct 2021 - Hedge Clippings | 08 October 2021
By: Australian Fund Monitors

    

Hedge Clippings | Friday, 08 October 2021

Last week Hedge Clippings dared to feel sympathy towards our current crop of politicians - something we're not normally accustomed to doing. We deliberately avoided mentioning the demise of NSW's Premier, Gladys, even though the news was hot off the press at the time. Suffice to say, we were saddened by her news as we genuinely believe, political preferences aside, that not only did she manage a difficult job well under extremely difficult conditions, but that she was undone by a bad choice of partner. Most of us can admit to having made the same mistake over the years. Some of us more than once, present company excepted.

To be fair, thanks to the federal/state system, devised as it was over 120 years ago at a time when communications and technology were vastly different, for a population of probably well under 5 million people, we have far too many politicians.

However, if we think we have too many current politicians, that pales into insignificance when one considers how many ex Prime Ministers are still doing the rounds. To save you Googling the answer, nine of the last ten PM's are still with us, and if you include also "almost" PM's, ten out of ten, as John Hewson would have been a Pwime Minister as well had he known the difference between a cake and a cabbage!

Unfortunately, with the exception of Julia Gillard, all of the ex's seem to think they are entitled to pontificate to their less than adoring public on whatever subject matter takes their fancy. Of course the media love it, and in particular in the case of Kevin Rudd and Malcolm Turnbull the French media at the current time.

It must be something in the personality of ex Prime Ministers, particularly those that had a relatively short term and/or unspectacular success in the top job such that either the electorate or their own party dumped them (in Kevin Rudd's case both). As a result, it seems that in retirement, complete with pension, they suffer from "relevantitus" a condition we've just coined to describe those that can't handle the fact that they are no longer relevant - except of course, to themselves.

OK, enough soap box for today. Back to managed funds and their performance.

As most fund managers would know, last Tuesday saw the introduction of new legislation involving a TMD, or Target Market Determination. Essentially this requires the issuer of retail funds to be very specific about the type of investor who should be investing in their product. At face value this is a great idea, because sooner or later an investor in the wrong product is going to result in tears. Or worse.

One issue with the TMD concept is that most equity based managed funds are considered to be suitable for a long term investment. However all too frequently the reality is that for a variety of reasons the performance of individual managed funds varies over time, including as a result of manager skill, or the interaction between the underlying strategy and prevailing market conditions.

As a result although nearly every offer document, and now nearly every fund's TMD suggests investing for the long-term, namely seven or eight years, the reality is that every portfolio requires constant evaluation, and adjustment along the way.

Diversification across a number of funds is a logical and sensible solution to overcome this. However, simply selecting a portfolio of the top 10 performing funds over the previous five years is no guarantee of their future performance. If you re-run the numbers five years later (as we do at fundmonitors.com) you may, or will, come up with a significantly different list of top 10 funds.

For instance, investing in a portfolio of the top 10 funds over 5 years to August 2016 would, over the following 5 years to August 2021, have returned 10.78% per annum - just below the ASX200's return of 10.94% over the same period.

Meanwhile investing in new portfolio the top 10 funds over the five years to August 2021 would have returned 16.11% per annum, so your capital would have grown by 68% more by switching or re-weighting.

Of course investing based on past numbers and with the benefit of hindsight is simple. Ask any economist. In the real world, it is not so easy.


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