This talk was given 28 January 2008
The text here may not be identical to the spoken text

Dog Stars

Dogs. And their celebration. What better place than the Kennel Club – making a difference for dogs – to do that. Before we come onto the funds that have been well and truly collared by the researchers at Best Invest a couple of dogs outside the world of investment.

This press release was issued by the Dept for Work and Pension on Wednesday 23rd January.

New powers to stop benefit fraudsters in their tracks are announced today by Secretary of State for Work and Pension, Peter Hain…Data matching pinpoints areas where fraudsters’ circumstances are clearly different to those declared on their benefit claim."

Thursday 24th January Sec of State for Work and Pensions Peter Hain resigns after data matching reveals that the donations made to his deputy leadership campaign were clearly different to those declared.

It’s a bummer that data matching.

And then on Friday we learned that Jérôme Kerviel had bet about €50 billion euro that markets would rise. They plummeted. And he lost about €5 billion. But of course these are bets. Someone bet the other way. Some traders have made €5 billion. They’re keeping very quiet aren’t they.

Anyway we’re here today to celebrate the funds which wish they had made €5 billion. Most of them made far less than that. Some of them actually lost money. At a time when the FTSE 100 rose by around 34%. Let’s look at some of those.

CF Canlife UK Smaller Companies – they picked well the companies they invested in got a lot smaller in falling 12% over the three years 2005/06/07 when the comparable index the FTSE Small Cap rose by 32%.

New Star Select Opportunities selected opportunities so carefully that investors lost 4% of their money over three years.

And Marlborough UK Equity Growth – not quite sure that putting the word Marlborough and Growth together is such a good marketing idea – but instead of growing it actually shrank by 5% over the three years.

Those were UK funds. In North America Invesco Perpetual US Smaller Companies – lived up to its name growing perpetually smaller and shrinking by 13% over three years.

In Asia, the Newton Japan fund defied gravity to lose 6% while a simple tracker would have grown by 7%. And Japan too had its share of Growth funds that shrank and another Invesco that did so perpetually.

I wonder if it is time to stop funds calling themselves these silly names. Leveraged High Yield, Perpetual Japanese, Emerging Markets. Some say they are invested in ‘financial opportunities’ or in ‘new startups’. And some are clear about the kind of person they want to attract by using words like ‘aggressive’ ‘special situations’ ‘dynamic’ or ‘cautious’. But the truth is that even when these words seem like ordinary English words that you can understand in fact they are no more than marketing tools designed to make sure that there is something for everyone. Worst of all are funds called ‘higher yield’ or ‘higher income’ or ‘growth’. It’s clear from these dogs that they represent the hopes or – as the promoters of them normally put it because they prefer long words to short ones – the aspirations of the investment company. They are not a promise and certainly not a guarantee. There are no guarantees – except of course that the amount you make is unpredictable and might be negative.

Actually of course that’s not quite true. One thing that is certain is that the managers will take their percentage out of your fund every single year and regardless of how your investment has performed. Up or down, good or bad, excellent or disastrous the annual charges will drip out of the bottom of your investment pot.

Now I know the problem with investment – it’s about predicting the future. And, as Niels Bohr, one of the greatest physicists of the 20th century and the man behind what we now call quantum physics, said ‘It is very difficult to make an accurate prediction, especially about the future’. But most people choose not to believe him. We back horses. We play online roulette. We look forward to things that may never happen. And we invest our money in an essentially unpredictable market.

Niels Bohr’s view was supported by the FSA in 2000 when it published research into whether investment funds that performed well one year were more likely to repeat that success the next1. It found no persistency in good performance. This year’s star could be next year’s meteorite plunging to earth in a shower of burning banknotes. It concluded that past performance is no guide to future performance. And every advert for investments had to include that phrase or something like it.

Of course some people think the answer is not to follow a fund but its manager – and they normally whisper the mantra ‘Anthony Bolton’. But research done by Citywire published in July 2004 showed that out of 175 fund managers with a five year track record, only 11, that is 6 per cent, managed to do better than the market average every year for five years. And there is no evidence that even this élite will continue to do better in the future. So picking the manager who will do well over the next five years – which is what matters – is an impossible task.

But on a closer examination of the FSA results in 2000 there is one exception to this rule. Bad funds tended to stay bad. If you are rubbish at your job, another’s year’s careful study of the market doesn’t actually make you any better.

And it is those persistently bad funds that we are here to celebrate today in the Bestinvest annual Dog awards. Now just to remind you, this is the Kennel Club we are in so not just any old dog is admitted to the Show.

To get in here you have to have been very, very bad. Locked outside the back door in the rain bad. Not just bad over one year. Not just bad over two years. But bad over three consecutive years. You must have done worse than a fund that tracked the relevant index in every one of those three years and end up at least ten percent worse over the whole period. Bad, bad, consistently bad.

It’s a tough test. And it’s a testimony to the abilities of the industry that so many funds with well known names and highly paid managers pass it. Invesco, Fidelity, Shroder, Aberdeen, Scottish Widows, New Star, HSBC, Artemis, Baillie Gifford, Credit Suisse, Natwest, Morgan Stanley, Jupiter all make at least one appearance here.

Now it’s easy to criticise especially with Hindsight – which incidentally is a very useful results service that tells us what’s happened in the past. And this year for the first time Bestinvest has published the names of the funds – or some of them – which reverse the Dog criteria. In other words they outperformed their benchmark every year for three years and exceeded it by at least 10%. And some of those famous names in the Doghouse are also here – Invesco, Artemis, M&G. So not all bad news. But remember past performance and all that.

But back to the dogs. Between them these 70 Dog Stars look after nearly £11 billion of investors’ money. And by filtering their own skill and judgement through expensive research departments and combining it with inside knowledge, these industry talents ensure the money entrusted to them grows more slowly, more carefully, more, shall we say, subtly than if they invested it using a cheaper instrument – such as a pin. So tough a test is it that only one fund has been in the Dog pack for ten consecutive years. Truly a Best in Breed. So step forward Scottish Widows Global Growth A – a fund which has been a dog for a record 10 consecutive years. In fact more than half of Scottish Widow’s funds have failed to beat their benchmark over the last three years. And thanks to its global reach Scottish Widows has achieved Dog status in international funds, in Japan, and in emerging markets. As its slogan says – Preparation is Everything. And this is the sponsor of the 2012 Olympics. I wondered today if you invested £2,012 in Scottish widows today what would it be worth when the Olympic flame is lit in East London? That would be a nice competition wouldn’t it?

Remember, anyone can pick winners. Picking losers, year after year after year, takes a special kind of skill. Persuading people to let you do it with their own money takes a certain flair. But getting them to pay you to do it – to drain away on average another 1.65% year of their savings – takes sheer financial genius.

So I say to our winners. Don’t just hang up the rosette that is pinned on you here. Use it. Use the pin to pick your investments next year. You might just save your clients some money.

1Past Imperfect? The performance of UK equity managed funds, Mark Rhodes, Occasional Paper Series, 9, FSA August 2000

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