Uncovering True Investment Performance!
How Anthony could have been better off by $100,000
Anthony didn't worry about looking closely at his super fund performance over the past few years. The reports provided by his adviser indicated that his investments were tracking in line with the selected performance benchmark and he was happy enough.
"They're a good, big well-known name, they seem professional, they seem to know what they're doing."
When he discovered that we routinely conduct independent risk/return diagnostics on investment funds, he was keen to know how his fund performed.
What we found is intriguing - and highlights some of the traps investors are lured into when they eek to understand their investment performance.
Anthony has $500,000 invested in a balanced multi-manager fund.
Our first step was to assess the fund's asset allocation and objectives and determine which group (or category) of funds to compare it to. The aim here is to provide an "apples with apples" comparison of Anthony's fund to other funds which have similar objectives and risk profiles.
When we assessed the fund, we found it aligned with the Morningstar multi-manager growth category. Interestingly, you will note that his fund is called a "balanced fund" and so many people would consider a 'balanced' benchmark appropriate. However, by looking at the underlying mix of assets, we could see that it was more accurate to call it a "growth" fund.
Our next step was to compare the 5-year performance. We found that Anthony's fund over the five years had returned an average of 2.7% per annum.
Now, like Anthony, you may be thinking that that's not too bad given the recent downturn. Yet, we found that the average per annum performance over five years for the fund managers in the category was 10.7%.
That's an 8% a year difference. In dollar terms if Anthony had earned the average return over the past five years he would have been better off by $100,000.
Our third step was to assess the level of risk Anthony was exposed to in order to achieve his return. One of our key investment principles is that you should never take risk for which you are not adequately rewarded. We found that, again compared with the category average, the fund had taken higher risks. Unfortunately, this is not an uncommon outcome.
When we presented Anthony with our analysis, as you can imagine, he was very surprised. "That's a pretty big difference. I know that the adviser is part of the same group that manages the money, but just didn't question it. I relied on their professionalism. I realise now that I should have looked at this more closely - I certainly would have been significantly better off."
4 questions to help you avoid losing money
- How has your portfolio - super and investments - performed in the past five years?
- Are you confident that your performance review used appropriate benchmarks?
- Do you have an objective measure of the level of risk in your portfolio?
- When did you last do your review?
If you would like to know more about assessing your funds so you can feel more comfortable about your current investments - or know what changes need to be made - then please contact us.
We'd be delighted to help.
Best wishes
Kate McCallum & Tony Clark
Principal Representatives of Multiforte
Tel: 02 8209 1607
www.multiforte.com.au
