In 1989 the Wealthy Barber (David Chilton) told readers “to look for (mutual) funds with a long-term track record; to make sure that the team who created the success was still running the show; to emphasize consistency by looking for funds that did well in both bear and bull markets; and to stay away from fad funds, focusing instead on value-oriented, disciplined management teams.”
Now that nearly 25 years has passed, let’s have a look and see how this approach has worked out.
Not so well, I’m afraid.
To his credit though, he concedes this in the sequel The Wealthy Barber Returns (2011). In his words:
“I’m forced to admit that funds matching those criteria over the years have collectively underperformed the market. What’s worse, some of the management teams in whom I was most confident have posted the weakest returns. It’s frustrating, but past long-term performance has proven to have virtually no correlation to future performance.”
Still it’s a popular strategy to use past performance as an emotional button when promoting mutual funds. But as hopeful investors flock to the successful funds, cash levels grow, often at the most inopportune times: when markets are high. This forces the fund manager to make a choice: buy high, or sit on cash and wait for opportunities. Waiting can be costly though, as market timing frequently backfires, not to mention the fact that idle cash in a mutual fund is still subject to fees.
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Jim Grant, CFP, CIM is a Financial Advisor with Raymond James Ltd (RJL). For more information call Jim at 250-594-1100, or email at jim.grant@raymondjames.ca.
It is no secret that mutual funds are having a tough go of it lately, as a growing number of commentators, advisors, and investors look for alternatives. Exchange-traded funds, for example, have grown in popularity in recent years with their promise of near market-matching returns. Indeed the Wealthy Barber makes a case for these in his 2011 book The Wealthy Barber Returns.
But ironically proponents of exchange-traded funds often still use past performance to make their case. It can be a compelling case, depending of course on which numbers you look at. According to Morningstar, over a 10 year period only 14 Canadian mutual funds have outperformed the iShares S&P/TSX 60 Index Fund (symbol XIU). However, let’s look at what has happened since 2011 — a period during which the Canadian stock market has averaged only 4.36% (based on 3-year returns to November 30, 2013). By having the flexibility to underweight the weaker sectors, the number of Canadian equity funds that have bested the XIU has grown from 14 to over 200, with 57 of these actually doubling the XIU.
It’s frustrating, but again we see that past performance has virtually no correlation to future performance.
So who can you look to for financial guidance when it seems that even the experts are still learning lessons?
To begin with: forget about returns, and here is why:
Because past performance has virtually no correlation to future performance.
For information on our approach visit, www.ds-online.ca and click on ‘Guided Portfolios’.
Jim Grant, CFP, CIM (Chartered Investment Manager) is a Financial Advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL. This article is for information only. Securities are offered through Raymond James Ltd., member-Canadian Investor Protection Fund. For more information feel free to call Jim at 250-594-1100, or email at jim.grant@raymondjames.ca.
