Don’t Blame Money Managers Solely For Losses – Look At Yourself Too

Statistics about how fund managers often underperform the share market are legion. For instance, 61.6% of US-based mutual funds (equivalent of a unit trust in Singapore) with a global focus had failed to beat their benchmarks over a five-year period ended 2012.

In 2012, 66.08 percent of all domestic equity mutual funds underperformed when matched against the S&P 1500 [a broad American market index],” wrote Richard Finger in an April 2013 Forbes article. He added: “In 2011 a swollen 84.07 percent were laggards, while in 2010 “only” 57.63 did worse than the averages.”

Given such figures, if you’re an investor who has lost money or who has not performed as well as expected in funds or unit trust, it might be easy to pin the blame solely on the apparent lack of investing ability on the part of most professional money managers. But, for some investors, the money managers might just be a convenient scapegoat.

Consider the following anecdote from fund manager Bill Miller that recently appeared in the Wall Street Journal (emphasis mine):  “…Mr Miller says he is used to dealing with investors who are fixated on the short term, noting that many of them wind up buying high and selling low. One large investor in Value Trust [one of the funds Bill Miller managed] yanked out all its money in 2008 despite his reasoning that it was the very worst time to do so, says Mr. Miller, who wouldn’t identify the investor.”

Miller added, “”We haven’t seen or heard from them since,” he says. “If they had left it in, they would have been at the top 1% of the market.”

Here’s some quick context for Miller’s statements above. He was a legend in the investment industry when he managed to beat the S&P 500 in every single year for the 15 years ended 2005. But, it all came crashing down when the Great Financial Crisis of 2007-09 hit – Miller suffered very badly with one of his funds collapsing by 58% in 2008 alone. When Miller’s funds tumbled, his investors started panicking and sold – right when it was “the very worst time to do so.”

It might be easy to conceive a notion that Miller might have some bones to pick with his investors, who deserted him by the droves (assets managed by his fund fell from a peak of US$21 billion to a low of just US$2.8 billion), when he said the above in the Wall Street Journal. But, there are some good statistics to show that the problem investors have with buying high and selling low is actually a wide-spread one.

David Swensen, the chief investment officer of Yale University’s US$20.8 billion (as of 30 June 2013) endowment fund and one of the best in the business, once gave a guest lecture in 2008. In it, he mentioned a study conducted by investment research outfit Morningstar. What the study found was stunning: Morningstar categorised equity mutual funds in the USA into 17 categories and found that over a 10 year period, all categories saw the average mutual fund investor dramatically underperform his or her own funds’ results (sometimes by as much as 13.4% per annum!).

And that happened, as Swensen said,because the investors “had bought after the funds had gone up, and they sold after the funds had gone down.” In other words, investors had been buying high and selling low.

A problem can only be solved if it is first identified. In the case of lacklustre or negative returns for mutual fund or unit trust investors, it would be very useful and healthy to acknowledge where the real causes might lie.

It’s likely that some fund managers would have to take the lion’s share of the blame for the poor returns of their funds. But for some individual investors in funds, it’s their own investing behaviour – buying high and selling low – that’s the main cause of the problem and they would have to adjust if they wish to ever earn satisfactory long-term returns in the share market.

It’s also important to note that investors in passively-managed funds (such funds do not have managers actively picking and choosing investments; exchange-traded funds that track share market indexes are one such example) can underperform the funds themselves as well if the investors engage in the same sort of buy-high/sell-low behaviour that’s rather prevalent amongst investors in actively-managed funds.

The SPDR Straits Times Index ETF (SGX: ES3) is an exchange-traded fund that tracks Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI). As of 31 May 2014, the fund has achieved a cumulative total return (where gains of reinvested dividends are included) of 170.88% since its inception in 11 April 2002. It will be really interesting to see studies of the returns of the fund’s investors as compared to the fund’s returns.

If history is to be used as a guide, I’d be willing to wager that a significant portion of the SPDR Straits Times Index ETF’s investors would have underperformed the fund. Do you know of any such study? Let me know in the comments section below!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.