4.2.4 The reporting of performance

The reporting of performance measurement varies from cursory to detailed, depending on the size of the investment. Managers of large pension funds have to provide their clients with detailed breakdowns of the risk and-return characteristics of their portfolios, and there are a number of consultants who specialise in such analyses. They also use the key measures such as tracking error and alpha.

When it comes to funds, such as investment trusts, OEICs and life assurance funds, more complex measures tend to be combined into a star-rating or number-rating system. This allows investors to identify good recent performers and high- or low-risk funds relatively easily.

It is rare to find a fund that significantly outperforms an index benchmark over the long term. It is very difficult to spot future winners, and past performance is not a guarantee of future performance, but analysing performance can and does say something about how the performance was earned and what kinds of risk an investor in the fund is likely to be taking on. It can also force investors to face the truth of their investment performance.

To finish this section, watch the video and hear Anthony Nutt’s observations on fund management performance and on whether chartism (that you studied in Week 3) is an aid to good performance.

Download this video clip.Video player: ou_futurelearn_mmi_vid_1121.mp4

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Transcript

MARTIN UPTON

Looking at performance: The last few years, in fact really the last decade or so we’ve seen low investment returns. Interest rates are at rock bottom levels and performances of certain of the key stock markets have been not particularly impressive. So what sort of problems does that present to fund managers?

ANTHONY NUTT (Retired investment director and fund manager)

Well it does present problems because when returns are not very strong it’s really quite difficult to generate added value. That would be my argument. I mean there are some good reasons why economic growth is more modest that it has been in the past: population is declining, consumption waning, too high levels of debt - the sort of issues that we talk about in the economic pages of the press each and every day. So those excessive returns, those high returns rather than excessive, are much more difficult to achieve over and above the prevailing rate of economic growth within a given economy.

MARTIN UPTON

Does that then make fund managers take more risk than they should with their portfolios of investments?

ANTHONY NUTT

It’s unlikely but it may do. Fund managers, as professional practitioners, should, do, I would argue, understand risks. They look at the companies they invest in, if they’re an equity investor, or indeed a debt investor. They follow those companies really quite closely. In some cases fund managers will have followed the company a lot longer than the people running the company. And they build up research, they build up information, they build up knowledge about the businesses they invest in with the intention of recognising any risks which might undermine the return that they’re expecting or indeed enhance it.

MARTIN UPTON

OK. One last question on performance: There’s a lot of talk about technical analysis or chartism, as it’s alternatively know, as a means of enabling outperformance of the market. Charts enable you to predict, if you take the view of those who are fans of chartism, enable you to predict future market movements - future price movements. What are your views on chartism?

ANTHONY NUTT

Well, frankly it’s changed over the years and I would say sitting here today I am not a huge fan of chartism. The reason being, what does it identify? It identifies what has happened to investing patterns; who’s been buying, who’s been selling in terms of volumes, what’s been happening to the share price of a given investment. So for me it’s much more about historical patterns rather than predictive patterns. And to then look at the historical patterns and argue that can be predicted and send signals as to what may happen in the future, I think is a pretty tenuous argument to my mind. So I don’t really look at charts. I think they tell me a lot about historical behavior in the share price of a given company.

MARTIN UPTON

Do you think that it is a trend whose time is past, basically? I seem to remember back in the 1980s, 1990s there’s a lot of coverage of chartism in the specialist financial press, a lot of courses were offered on chartism.

ANTHONY NUTT

Indeed, I know people ...

MARTIN UPTON

But I don’t seem to see as much focus enthuses these days.

ANTHONY NUTT

No, I think that’s right because I think investing patterns and investing behavior during those times was more uniform, more understandable, and less sophisticated products were on offer. Now that’s not a particularly good point. The point I’m making there is the investment arena, the investment banks, the providers of investment products have offered more and more esoteric products to the retail investor and indeed the institutional investor and I think that’s complicated the expectation of returns.

MARTIN UPTON

Anthony, my most recent experience with chartism was not a good experience. I looked at the charts of a particular share and said, ‘This share has to be sold.’ So I did and low and behold within weeks it had soared upwards in price. So it was not a sell it was a hold or buy. So perhaps in the future I’ll be putting the charts to one side, hey!

ANTHONY NUTT

There you go Martin. Did it meet your criteria though?

MARTIN UPTON

Um, possibly not really on reflection.

[Laughs]

Thanks, Anthony.

ANTHONY NUTT

Thank you.

End transcript

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