Feedback from TEBI readers is telling us that you want to see more video content, and your wish is our command.
We’ve had an excellent response to our new video series #InvestingSuperheroes, and here’s another new series to get your teeth into. It’s called #OneMinuteInvestor, and each video will give a little insight into how investing and the investing industry really work.
The first video in the series looks at recommended fund lists, sometimes known as buy lists. We lead such busy lives that when we’re offered a short cut, something that saves us time and effort, we generally like to take it, and that’s precisely why fund platforms and brokers produce these sorts of lists.
But are they of any use to investors? Research by UK’s Financial Conduct Authority, showed they can be very misleading. In its interim report on its study into competition in the asset management industry, the FCA reported that most funds on these lists fail to beat the market and that firms that publish them are often biased towards their “own-brand” funds.
We shouldn’t be surprised. Academic research has consistently shown that, in the long term, only a tiny fraction of funds outperform the market on a cost- and risk-adjusted basis. Dr David Blake form Cass Business Buisness School puts the figure at around 1%. What’s more, he says, future outperformers are impossible to identify in advance.
The difficulty of identifying future star managers ex ante was highlighted in a paper published last summer, Investment Consultants’ Claims About Their Own Performance: What Lies Beneath?. It was authored by Tim Jenkinson and Howard Jones from the University of Oxford’s Saïd Business School, Jose Vicente Martinez of the University of Connecticut and Gordon Cookson from the FCA.
The researchers looked at the performance of funds recommended by investment consultants between 2006 and 2015. Once fees were factored in, they discovered, the funds that consultants didn’t recommend subsequently delivered better performance than those they did recommend.
The bottom line is, these fund lists aren’t meant for your benefit. They’re a marketing gimmick. The media loves them. Investors should ignore them.