• Virtually all whole-of-market lists identified and avoided serial poor performers.
• Post-selection, listed funds as a cohort outperformed unlisted funds.
• It eased the burden of fund selection for advisory businesses.
However, there is only a small number of funds that appear frequently across lists.
It was clear researchers could have very different opinions about the same funds; this suggested that some researchers were getting different data from the same managers, or (more likely) their qualitative analysis – for example, interviews with fund managers – was prone to perception biases and/or an overemphasis on forecasting and opinion.
Some researchers appear to pay more attention to process, or a manager’s demeanour, than the numbers. Most surprisingly, the report found little evidence of a relationship between qualitative research and future alpha, versus pure data driven analysis.
Assessing suitability requires that the expected behaviour of the funds selected matches the asset allocation box that they are going to occupy in a portfolio. This is the weakness of any adviser process that simply copies and pastes funds from lists.
Most fund lists do not calibrate to asset classes per se. They are performance and demand led; that is how they get on most researchers’ radars.
Selection is not linked to the weight of assets in the sector, nor is it concerned with the degree to which a fund’s behaviour varies relative to its benchmark. Indeed, many funds choose the sector average as their benchmark rather than the index of the market they represent.
This can lead to selection error, particularly where the asset allocation model has rigid definitions of the asset classes or, more importantly, where sectors cannot be matched to an asset class; for example, absolute return.
The use of researched lists is growing, but the opportunity to calibrate fund selections to portfolio modelling tools is still largely absent from the market. Perhaps unsurprisingly, Dynamic Planner’s ACE Fund Rating Service (Asset Consistency and Efficiency) – the most recent addition to the pantheon of researched lists – has recognised this mismatching potential.
Suitability demands advisers take a critical look at their current fund research provider, and align themselves with the research that best reflects their portfolio construction process.
Graham Bentley is managing director of gbi2 Investment Intelligence
Key points
· The returns savers might expect are likely to be substantially lower than those experienced by today’s retirees.
· The suitability imperative requires advisers to have a robust investment process.
· Some researchers appear to pay more attention to process, or a manager’s demeanour, than the numbers.
