Peter Sharkey Investor’s Diary - Just how do you judge a good investment?
A sizeable number of investors consider many of the statutory written statements the financial services industry is obliged to make to be completely superfluous. A waste of paper, postage and time. I often find myself agreeing with them.
For instance, an insurance company recently sent me a whole wad of information liberally sprinkled with annoyingly simplistic 'Key Facts' which made me wonder why seven-year-olds would be interested in life assurance.
It's easy to mock, but nowadays, far too many documents and instructions are written for people whose association with the three Rs is at best tenuous and at worst non-existent.
This does not mean that regular, reasonably-educated folks, should ignore the most important instructions, even though many of them appear to have been written for a pre-school class.
Perhaps the most critical of these is the one which informs us that past performance is no indication of what may happen in the future. To ignore it is to introduce an unnecessary element of risk to your investment performance.
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For those perennial doubters, furthermore, there is a significant volume of evidence which proves that past performance provides few hard facts with which to predict future returns, even when vast armies of analysts are employed to foretell the future.
Although active fund managers in particular might say that, by researching companies in great detail and, in many instances, meeting executives face to face, they have an excellent chance of creating a portfolio likely to out-perform the most deman-ding benchmark, research by the Vanguard fund manage-ment group suggests otherwise.
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Vanguard maintain that over any 12-month period, few actively managed funds beat their benchmark and those that do perform only intermittently and for comparatively short periods.
The group analysed a raft of information, drawn from FTSE, Barclays Capital and Morning Star, the fund management research company. It found that over 15 years, fewer than one quarter (23pc) of UK equity funds out-performed the FTSE all-share index.
In other words, 77pc of such funds failed to meet their benchmark, a sobering thought for investors who may have hoped that consistently good fund managers would continue in similar vein for many years.
Unfortunately, this is not the case and Benjamin Franklin's observation that 'he that lives upon hope will die fasting', is one perennially hopeful investors should note.
So is there any salvation at hand for folks who appreciate that while past returns are no guide to future performance, they simply do not have the time or resources to undertake every aspect of equity investment themselves and would prefer, if possible, to leave it in professional hands?
Of course, this depends upon the investor's attitude towards risk.
However, Tom Rampulla, Vanguard's chief executive, believes that investors may mitigate part of the risk inherent in any equity invest-ment by paying close attention to fund management costs.
'Over time,' says Mr Rampulla, '[cheaper] index funds will beat the majority of active funds in any one year.'
He continues: 'You may sacrifice the opportunity to 'pick the very top funds', but picking the top funds is very hard to do.'
Almost as difficult as predicting the future from past performance, in fact.