80% of Irish Funds underperform the ISEQ

There is an interesting article in the Sunday Tribune about how 80% of funds invested in Irish shares underperformed the index this year.

Over three years, it falls to 5%.

The article is by Gary Mahood, who used to run Quinn Life, but I don't think he has been involved with them for some time.

That's 95% of funds failing to beat the market over 3 years. Its around the same figure for 5 years. Pretty amazing that its so high. The figure I always see is 70/75% of funds will fail to beat the market. Yet people are quite happy to invest with them and pay the higher management fees, I just don't understand it. Although, if everyone invested with index trackers there wouldn't be a market.

A good post Brendan!

A book I'm reading gave two simple tips for investment:
1. Pay close to zero in annual costs
2. Diversify.

I.E. Stay away from 90% of funds!

The more I read posts like this and others re term deposit rates in banks the more I'm disposed to just put my money into the latter and forget stocks etc. I know we are supposed to diversify when investing but given the rates the banks are offering wouldn't you be just as well diversifying by putting your stash in the various banks (as opposed to only one) thus avoiding putting all your eggs in the one basket?

Absolutely not. All this research suggests is that you are better putting your money in an index tracker than in an actively managed fund.

It says nothing about whether you are better putting your money into cash or the stockmarket.

Brendan

I think that if you buy these shares IETF.I , which are a tracker for the top 20 companies on the Irish Stock Exchange, you will at least match the index.

http://www.davy.ie/PricesAndCharts?equityIdx=0$$$IETF.I

I'm never able to figure out how these fund managers, who are paid vast salaries by the various finance houses, still cannot match the index. What are they paying them for, if not to outperform the index?

Surely they should be employed on the basis of a commission for every point that they outperform the index by, zero commission if they fail to match it, and the sack if they lose too much or if they fail to match the index over a 3 - 5 year period.


Murt

Nobody in their right mind would apply for a job on that basis - you couldn't possibly earn a living consistently, if at all!

I dont have a financial background but I assume these fund managers do and are taught all about P/E ratios and other fundamentals. So I assume the majority, if not all, would be from the 'value' school of investing.
Does this imply that value investing is a waste of time?
I think so.

Some damning statistics indeed - but not unexpected. In the US, the mutual fund industry is both high volume and fiercely competitive. However, there approximately 75% of fund managers do not beat the S&P 500 year in and year out (the exact percentage figure fluctuates from year to year). Indeed, only ten of the ten thousand actively managed mutual funds available managed to beat the S&P 500 consistently over the course of the past ten years (source: Motley Fool).

Broad-based market indexes (such as S&P, ISEQ) beating actively managed investment vehicles (i.e. managed funds) isn't just a one-off thing - it is a simple fact of investing life. Actively managed investment vehicles face many challenges in beating an index - despite their staffing with smart, educated people with access to advanced research and market analysis tools.



I fear that consumers in Ireland may not be as "informed" on this area of personal finance as they should be. The Irish market tends to be more volatile than most due to our "small country" status (more than 40% of the index's value is comprised of just four banks). The performance of the ISEQ index over the past few months has demonstrated how hard we can get hit. Maintaining a balanced portfolio with significant exposure to many international markets (UK, Europe, US, Asia) can help. Many of these markets are far more mature than the Irish market, with higher volume - meaning volatility is significantly less than in a small market like Ireland.

Brendan said:

Absolutely not. All this research suggests is that you are better putting your money in an index tracker than in an actively managed fund.

It says nothing about whether you are better putting your money into cash or the stockmarket.

Brendan

Click to expand...

Good point. Don't let the reported poor performance of active investment vehicles discourage you from the stock market. Take a look further down the Sunday Tribune article referenced at the beginning of this thread - "Between 1970 and 2006 the Iseq produced a real return after inflation of just over 10% per year."

The stock market offers an excellent mechanism for investment - remember though that 'investing' is implicitly a long-term proposition. Short-term gyrations such as the ISEQs performance this year are inevitable - however they smooth out over the longer term, leaving you with an investment vehicle that comfortably beats both inflation and the performance of cash.

Murt10 said:

I'm never able to figure out how these fund managers, who are paid vast salaries by the various finance houses, still cannot match the index. What are they paying them for, if not to outperform the index?

Surely they should be employed on the basis of a commission for every point that they outperform the index by, zero commission if they fail to match it, and the sack if they lose too much or if they fail to match the index over a 3 - 5 year period.


Murt

Click to expand...

In the US, one metric of increasing interest to mutual fund shareholders is insider ownership - i.e. how heavily invested the managers are in their own funds. A manager heavily invested in his own fund would help somewhat to address this challenge - when the fund goes down it directly impacts their personal wealth.

This metric actually does fundamentally influence fund performance. A study released in August 2006 (see - Section 3) looked at funds with insider ownership in 2004, and found those funds with insider ownership outperformed their counterparts by 2.5%.
Morningstar, probably the leading research house on mutual funds in the US, actually factors insider ownership into their fund ratings (along with performance, fees and management tenure).

Since 2005, all mutual funds in the US are required to disclose their managers ownership. Does such a mandate does not exist in Ireland? If not, introducing one might help deal with this concern.........

I don't want to take this off topic, as the article is referring to the Irish Stock Market, but do bear in mind that some index tracking funds are more expensive (in AMC terms) than their actively managed brothers and sisters. Therefore, the index tracker fund will have to outperform the active manager by the annual % difference in charge, so as to break even.