The key to evaluating an investment manager is to try and figure out how they will actually handle your money. It is a game of spot the liar. Most managers nowadays are highly polished; they know exactly what to say and how to say it to spin the story they want to tell you. Sometimes this can be quite different to the truth. In my years of being an adviser, performance is one of the areas that I have found to attract the most smoke and mirrors. Granted, it is the whole reason you employ an investment manager, so it pays them to present their performance in the best possible light.

Here are my top 5 favourite tricks investment managers use to present their performance:

• Emphasis on Performance Since Inception: this is pretty much a guaranteed sign that recent performance has not been good. Sometimes it is a sign of poor long-term performance. Be vigilant if you see this. Most funds have excellent from inception performance figures, but there are reasons for this. Survivor bias ensures that managers who don’t have good starting performance can’t raise money and usually don’t survive. Also, when you manage small amounts of money, it is relatively easy to manipulate your performance. This means that a great since-inception performance figure is relatively easy to achieve. So, if you see too much emphasis on since-inception performance, dig deeper.
• Performance Relative to an Irrelevant Benchmark: This is a favoured trick of many investment managers. For example, small-cap managers often love comparing themselves to the All Ordinaries index, even though it is well known that small caps broadly outperform large caps in most positive market conditions. Yes, they underperform when markets are bad, but we all know markets go up more than they go down.
• Using Cash as a Benchmark: Of course, whether cash is a relevant benchmark to an investment manager depends on what type of funds you are managing. For example, it is way more relevant to a fixed interest manager than an international shares manager.  Don’t laugh – I have seen international managers use it. Markets go up more than they go down, international shares should significantly outperform cash most of the time. Outperforming cash when you are an international share manager does not make you a money management genius. Help me out – don’t insult my intelligence and give me a benchmark that makes sense.
• Presenting Only Gross Performance (Before Fees): You would think this would no longer be a thing, but surprisingly, I have seen it plenty of times in the wholesale investment world. Investment managers don’t work for free. Fees matter. I want to know the return I will actually receive in my hand. Net performance after fees is the only performance I want to see and is the only performance that matters.
• Where’s the Performance? This is like the fund manager version of ‘Where’s Wally’. Sometimes the fund performance is hidden somewhere at the back of a ridiculously long monthly update, which spends its time discussing how hard or complex markets are to justify the poor performance. It’s up to you to spot it hidden amongst the endless words and charts. Trust me, when performance is on the back page, it is never good!

Performance is crucial—it’s the reason you hire an investment manager. You need to ensure that you are looking through all the smoke and mirrors to evaluate the true underlying performance. All fund managers underperform at one period in time or another. It is a hazard of the job. The key is to make sure that it is not persistent. So, watch out for the above tricks!

Kind regards,

Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently

General Advice Warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. It does not represent and is not intended to be personal advice.  Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.  We strongly suggest that you seek professional financial advice before acting.

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