When fund managers report their returns on investments, all make a simple assumption. They work this out using ‘time-weighted returns’, measuring the value of an investment at the start of the reporting period and then at the end. It makes the assumption that no deposits or withdrawals are made throughout the term, and so it overlooks the real-world experience of many investors.

Sadly, that kind of reporting does not send a good message. When things called 'dollar-weighted returns' are calculated, adjusted for when people are really investing or pulling out, a whole bunch of studies show the investor experience is infinitely worse. The most cited study is DALBAR’s QAIB report (Quantitative Analysis of Investor Behavior), and in its most recent up to 2002, the report for 30 years from 1/1/1992 in annualised returns for the US shows:

Typical equity fund investors, 7.13%
S&P500 index, 10.65%

Research over the past decade shows instead that investors earned around 1.7% less each year than they would have based on reported total returns on their funds, again because of timing of buys and sells. In a public presentation years ago, Kerr Neilson of Platinum stated that a study of his clients revealed entry and exit timing cost 6% a year. A 2021 report on Cathie Wood’s widely followed ARKK Fund (which has imploded over the past 12 months, down 61%) revealed that clients in Wood’s flagship had underperformed the fund itself by 8%.

Whichever number is accurate, it’s a sobering reminder for anyone trying to time today’s threatening market conditions. Investment outcomes are based on behaviour through fund selection and performance.

I was reminded of this during a recent conversation with a friend who buys and holds stocks and funds for years, even decades, without regularly checking the prices. His investments have done so well in some cases that the annual dividends surpass the entry price. Most of us (me included) try to time the market and falling markets are a psychological test. Two individuals might have commenced 2022 with identical portfolios, but what they do in the current market environment will dictate not just their returns for this year but many years forward. I suspect the sellers do better than the buyers over the next 12 months, but that the opposite is true in the medium to long term.

And the market shows no empathy whatsoever. It doesn’t know who you are or gives a damn about you. If you risked too much to hit your long term plan, and potentially wrecked your retirement along the way, the market has zero sympathy. At the end of the day, it’s up to you and with the best will in the world, who knows what the future holds – if nothing else, fund managers would love to (you can see that in their high cash positions currently (Source: Bank of America Fund Manager Survey (FMS)).

Regardless of whatever markets are doing, there will be new products launched. Equity Trustees this week identified the latest 100 funds it has been engaged with around the industry. It has the effect of including many structures (managed funds, ETFs, LICs, etc), managers from around the globe, and many asset classes. Asset class focus of fund managers.

Democracy and Our Sausage

Early election results were intriguing with Australians voting for all action on gender, integrity and climate change. Tough times for Labor coming to power needing to balance spending and austerity. The only world peace, a cheap borowo rite and low inflation are over. But we focus on the bright side of our very good election process. We can rightly have a go at our politicians and our media, but Australians have the best of it when it comes to how we vote and our peculiar democracy sausage, regardless of what side of politics you sit on.

Retirement and Generation Winners

In the aftermath of the election results, and a political climate that has already started to display the new, less antagonistic and divisive, era, two articles this week concern intergenerational fairness. Australia has plenty of age-related policies to review, but none more pressing than home ownership. At virtually all ages, the year you were born helps determine how likely you are to own a home.

Inter-generational warfare erupted during the election campaign, culminating in the 'super for houses' Coalition policy, which is now been returned to the shelf. Peter Abelson says an analysis of the data across nine dimensions of well-being used by the OECD reveals which generations Baby Boomers, Gen-X, Millennials have performed best. It’s not all doom and gloom for younger people.

Then Terry Rawnsley and Asaf Cohen display results of a KPMG survey titled ‘When Will I Retire?’, reining back the effect of an ageing population across multiple variables.

Crypto Crash

Whether the 10,000 cryptocurrencies on issue have any merit is an open question, but they do make the news. Just this last week Christine Lagarde, the President of the European Central Bank (ECB), stated the following regarding crypto in an interview on Dutch television:

“My very humble assessment is, it is worthless. It is based on nothing, there is no underlying assets to provide a safety anchor... I’ve said all along, crypto-assets are highly speculative, very risky assets. It’s your prerogative if you want to invest there.” But when it comes to crypto-assets, what I’m really worried about is that those investments are made by people who are fully aware of the fact that they can lose it all.”

Paul Mazzola and Mitchell Goroch explore the arcane world of crypto and stable coins to find out whether these so-called investments, which thousands of people have created and sold to an eager audience, have any real value.

Different This Time? Cash in Hand

A pair of articles from senior fund managers on the current market backdrop. Tom Stevenson asks if there is such a thing as ‘This Time Is Different’ when considering a Goldman Sachs report on four significant changes in the equity market, while Robert M Almeida says the last few years spent chasing the symbolism of a bird in a bush, we should now have new respect for cash. Better in the hand, the bird.

Putin Review

Then John West reviews Catherine Belton’s book on Vladmir Putin, by exploring how his meteoric rise to power, and his wish to remain top dog, influenced his ghastly decision to invade Ukraine. Reminds me of our first democracy article. And while democracy is very imperfect, many autocracies seem to be pretty awful to both their citizens and their neighbours.

Market Volatility and Opportunity

Perpetual Private’s White Paper this week examines what value opportunities are arising as volatility roils the market.