Past performance is not a guide to the future. The value of investments can fall as well as rise. The views expressed in this article are those of the author and do not necessarily represent the views of Standard Life. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this content.
According to financial theory, markets are efficient, which means you can’t beat them in the long term, so there is no point in even trying. Therefore, all investors should just hold tracker funds!
The reality, as we all know, is somewhat different. Most active fund managers will have periods where they might beat the index, but very few can manage it over many years. However there are indeed a few managers out there that have a record of producing consistently superior returns. They should form the core of any fund of funds. And there are also individuals out there who may not be the manager for all seasons, but are able to perform extremely well in a given set of market conditions.
For example, over the past three years you could have more than doubled your money by holding one of a number of emerging market or specialist resources funds. In contrast, at a different point in the cycle, you could easily lose significant amounts of money in these sorts of funds instead.
To maximise returns within a given set of risk constraints, we believe that you need to get the right mix of both quality managers and good asset allocation. These are not easy skills – after all, few investors have the kind of market experience for the latter, or the detailed knowledge required for the former.
This is why funds of funds have taken so much market share in recent years and why this process will only accelerate from here in our view. Funds of funds offer products tailored to meet a client’s risk appetite and desired asset allocation. And the outsourcing of fund selection fulfils a variety of functions for advisers, allowing them to concentrate on looking after their new and existing clients.
Inevitably, one should caution that as with all investment products, funds of funds offer no guarantee of improved performance. However, it is important to choose a fund of funds that is genuinely aiming to outperform, and there is the comfort in knowing that a saver’s assets are almost certainly working harder than if they were just handed over to one manager and then forgotten about.
Links to other newsletter stories
Help with IHT planning: Part 1
Help with IHT planning: Part 2
Strength in depth in UK Equities
• What funds where?
• Past performance summaries
• askTECH
• Adviser News archive
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