There is a fascinating thread building in the comments section of my post on Value Assessments and False Prophets.
In this blog I try to pick out the key dynamics of the comments and synthesize them into an insight on how Value Assessments could be improved.
George Kirrin and Con Keating both write about what we can gain from a post-mortem of a fund manager’s performance. I use the phrase “post mortem” as George uses the word “decomposition” which I have always taken to be what happens after death.
What George Kirrin says
George’s comments are about creating a method of examining what occurred after money was passed to a fund manager in absolute terms. He draws a distinction between decomposition which breaks down what happens against what the market did and attribution analysis which compares what happened relative to other funds. managers.
George is setting out to assess the value he has got so that he can learn from the past what the future can offer. He has – as a fund manager – applied principles (which he sets out in his comments) which he believes helps him forecast future returns.
The post mortem is a backwards look at how well the principles stood the test of time (in the case he used of the time between 2002 and 2012).
What Con Keating says
I had an appointment with a consultant ophthalmic surgeon last week (cataracts). At the end he asked if I had any questions – his explanations had been exhaustive. I asked about his track record of deaths and complications (None and less than 1%). I know that it tells me nothing but it did add to my confidence.
On fund managers – would anyone really want to choose the incompetent? It seems to me that while asset returns may not be forecastable with any meaningful accuracy, the costs and fees and charges of a manager are highly predictable.
We should not expect price behaviour to shift, no matter how much analysis we conduct.
In the short-term speculation and the whims of market participants should continue to dominate. However the long term may be a different matter.
There it appears that factors such as growth and demographics really do matter. However, what seems to be absent is a role for past market performance other than perhaps in the wake of the excesses of bubbles and routs.
It is rather interesting that the Pensions Regulator is setting itself up as an arbiter of future returns in its proposed prescriptions under the new Funding Code. I have recently been looking for empirical studies of long-term forecasts and have so far not found any other than those based on economic and demographic variables.
One thing that we can be certain of though is that gilts yields are hopeless as forecasts of future returns, other than for gilts.
Back in the day when I was a fund manager, we used to do a detailed performance attribution every six months; the only thing we ever found recurrently was a tendency to be overly bullish or bearish in those industries we knew best.
This, long-term, is also a topic where the wisdom of crowds is likely to mislead us – that is conventional wisdom. It will certainly be late for turning points.
“Lower for longer” is now conventional wisdom for gilts. With that in mind Charles Goodhart’s latest book The Great Demographic Reversal is well worth reading – that foresees higher inflation, higher rates and slow growth over the coming three decades.
Why we need value assessments
If we are assessing the value we have got from a fund then what has happened in the past clearly matters. The Kirrin approach, a kind of pathology of returns achieved against returns promised is helpful if you are a fund manager.It ensures you sharpen your tools for the future, but it doesn’t do much to help the customer unless the fund manager is prepared to come out and say what he or she expects is going to happen.
The problem is that the FCA illustrative return figures are cover by which fund managers can hide and so we do not get a target return on which we can decide whether to invest or a means to conduct a meaningful post mortem.
This is why we need Value Assessments and why the FCA are keen that fund managers do some explaining when funds fail to meet professional expectations.
The Keating approach starts by looking at managers for their competence (in managing transactions) but Keating does not have Kirrin’s confidence in principles that can predict future growth (certainly in the short term).
I find myself agreeing with Stanley Kirk, the third in the trio of commentators who concludes
It seems that further development of the “value assessment” concept is required, especially creating a level playing field.
Thoughts from a consumer
It’s problematic that asset managers , fund managers and platform managers are allowed to judge the value they give amongst themselves without any agreed method of publishing track records.
People want to see personalized performance and by this I mean their returns – rather than some abstract return that they have not experienced. This is why – in a time when technology permits – internal rates of return should be available to all savers.
It is also clear that with regards pensions we are all saving to a common end – which is the accumulation of sufficient wealth to pay us an income sufficient to our needs till the day we die.
The amount we need to set by is clearly influenced by the return we can expect on our savings so we need clarity on what is achievable and this is where George Kirrin’s principles are critical.
We also need to know that the managers we choose to invest our money are competent, which is what Con Keating is talking about.
But most of all we need a way to compare and understand not “what is the performance” but “why is the performance”?
The post mortems can only focus on what is on show. The value assessed has to be based on the value achieved for each consumer and must take into account each consumer’s experienced rate of return.
And the “why” in the performance , may be explained as much by the performance of the fund and the platform, as by the assets.
The only thing that matters to consumers is what they get out of their savings and that is what value assessments need to focus on.
the more I read about past performance and its use in assessing value for money, the more I feel that you are simply assessing past value for money. And much as I would like to say otherwise, just as past performance is most definitely NOT a guide to future performance, so too past value for money is no guarantee of future value for money. I find myself far more in sympathy with Robin Powell’s Evidence Based Investing, and basically keeping the COST of investment to a minimum and using collections of passive index funds. I do not honestly see much value in knowing how well you have done in the past as you cannot change what has already happened. There is no possible way of identifying which active funds will outperform the market consistently over the long term, no matter what active fund managers tell you.