The Deception of Relative Performance

It is almost every day that I walk into a meeting where someone is sitting with a monthly fund performance report and wants to discuss the performance of one fund relative to another.

It may be natural to want to discard one fund in place of another in situations where Fund A has returned 10% and Fund B 20%. What we as investors have to realize is that different funds, even in the same fund classification, will be composed of very different components and in very different proportions. This being said, it is very unlikely that two different funds will return the same short term performance over the same review period.

Think back to the last time you sat on the beach and watched the surfers bobbing around waiting for the next perfect wave. Some of the time you would see some of the surfers and as the motion of the swells came towards the beach those would disappear from view and you would see others. At no time would you have seen all of them in a single moment – unless the ocean was absolutely flat that day, and then you wouldn’t have seen any surfers there anyway.

What I’m getting to is the fact that relative performance is simply a snapshot in time of the funds relative to each other. The market goes through cycles very similar to waves of the ocean. Wind your review period back or forward and the picture will look very different. There will always be someone in the trough of the wave and someone at the crest.

Unless one could find and ride a never-ending wave, it is virtually impossible to be at the top of every frame of the picture at the same time. And, in attempting this, you would have to deviate from your investment philosophy quite regularly.

What we know is that those at the top of the current wave are likely to be closer to pulling out when they feel their ride is coming to an end, and then go into a setup phase for the next potential wave. Those in the trough, that aren’t caught sleeping, should already be positioned to catch the next wave.

Focus on the future

While it is important to consider the relative performance of funds, it is key to be confident that the investment you make today is going to managers that are ready for the next market cycle. This is not an easy task, but it may be helpful to ask yourself:

  • Do you believe in the way the manager is investing?
  • Does the manager have the required skill and not only rely on luck?
  • Does the manager have a repeatable process to consistently perform well?
  • Under what circumstances and over what period should the strategy pay off?

What does this mean to us at RE:CM?

We have been preparing for the next wave in both our Flexible Equity fund and the Regulation 28 compliant Nedgroup Investments Managed fund. We are very optimistic that when the set arrives, we will be ready to ride it.

Remember, a fund’s performance should be measured by how many waves or cycles it has meaningfully participated in without being dumped at the end. This requires the knowledge and ability to prepare for and then invest in the right wave early and get off it before it ends – even if for a moment you seem very different from the rest.


Posted in News, Press Room

The Allan Gray-Orbis Global Equity Feeder Fund remains fully invested in global equities. The objective of the Fund is to outperform the FTSE World Index at no greater-than average risk of loss in its sector.