Ed Moison is a journalist and writer for Ignite Europe, an FT service covering the wealth management industry Economics of Fund Management.
Former UK education secretary Michael Gove once made such a claim Every school in the UK can be above average, widely ridiculed. But what seemed a bit surprising for schools has become possible for fund managers.
A comparison of the performance of more than 2,700 funds sold in the UK with their peers showed that 45 per cent of funds delivered first quarter returns – as long as they were allowed to choose which time period to use, one year, three years, five years or a decade.
The picture is better for fund managers looking for funds with above median returns:
In contrast, the same data reveals that 41 percent of the funds ranked the minimum Fourth at one time or another.
But even this finding supports essentially the same conclusion: active fund managers can justify their past performance as long as they can choose the time period. This opens up the possibility for managers to cherry-pick statistics to make them look as good as possible, or at least to argue that periods of underperformance are temporary distractions.
This reflects that the fund’s performance fluctuates more than peers. So like a bit of active manager return analysis Sticking jelly nails on the wall.
This number crunching is not a handiwork that has no real purpose: wealth managers to do Use multiple time periods to demonstrate that they are doing a good job for their customers.
A good example of this relates to the UK’s requirement for authorized fund managers to carry out an annual assessment of the value they deliver to clients. These value assessments show that the above results, if anything, understate how well asset managers are claiming.
Trawling through the most recent of these quality assessments, 89 percent of funds claim to be delivering good performance. (The ratio claimed to provide better value for money overall is higher when other non-performance factors are taken into account).
Ironically the rules requiring these quality assessments were introduced after a study by the UK financial regulator found that many active fund managers were underperforming and could not justify their fees.
Using multiple periods to stretch out good performance by active managers can affect cash flows.
If professional fund selectors working at banks or asset managers look beyond headline statistics or temporary performance, they can still find actively managed funds to recommend to their clients—providing seemingly good reasons to resist the siren call of index-based products.
This is particularly evident in the UK and Europe, where money is flowing into actively managed funds, far more than in the US:
It just goes to show the adage that if you torture data long enough, it will eventually tell you what you want. Maybe the asset management industry wants everyone to look at performance data the way Michael Gove looks at averages.