Bill Jamieson: '˜Performance' no indicator of portfolio success

What is investment '˜performance', and how do we measure it? Fund managers frequently boast that their portfolio has outperformed this or that broad market index. But if they are managing a specialist fund, of what value is such a comparison when performance against it is irrelevant to their sub-sector or specialism? And can an investment be said to have done well when the fund may have outperformed a chosen comparator but still fallen in value?

These are questions that wealth managers ought to ask more often than they do. Robin Angus, veteran sage at the Edinburgh-based £640 million Personal Assets Trust (PAT), has laid bare his misgivings in the latest quarterly newsletter over the trust’s habit of showing its performance relative to the FTSE All Share Index. It is a masterly and thought-provoking analysis.

Almost all other trusts carry similar comparisons as a matter of long- established practice. But it is, he writes, “the blinkered idiot theory”. Such comparisons tell us little, either about the success or failure of the trust in terms of capital protection, or about the specific performance of the trust itself – the selection of the holdings within it and how they have measured up to the fund’s aims and purposes.

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Professional managers and private investors alike, he argues, are prey to a great distraction. There is barely a session with an investment adviser – or investment trust annual meeting – that is not plagued by questions such as “why not invest more in the Far East?” or, “should we invest more in emerging markets and bio-technology” or whatever is the popular fad of the moment.

The problem with such questions is that they can send us scuttling off in different directions at once, piling into specialist markets and sectors that are already fully valued. We end up, less with a coherent portfolio than a range of leaky buckets left out in the hope that one of them will catch more rain. Our savings become a hotch-potch of disparate holdings: less cognitive dissonance than cognitive cacophony. Investment is not, Robin Angus argues, “about buying a little of this and a little of that, to get ‘exposure’ to every area and have a finger in every pie in the hope of finding plums to pull out. But all too often this can lead to nothing other than long and straggling portfolios with high trading costs and indifferent (to say nothing of undifferentiated) performance.”

This curse of distraction is heightened by a common behavioural trait of investors only to check on their fund or trust performance when markets have been rising – we don’t care to look after markets have fallen. And all this comes with the damaging corrosion of opportunity cost. We are distracted from the need “for calm and sometimes solitary reflection about the markets – all successful investors need to have a contemplative streak – you are at risk of doing something you should never, on any account, do. You are at risk of letting someone else set your agenda – of letting someone else decide for you what you are trying to do and how best you should do it.”

So what is the driving investment philosophy of PAT? There are two approaches to investment: one is the fox, which knows many small things, and the hedgehog, which knows one great thing.

The foxes, says Angus, are the ones who buy a little of this and a little of that, to get exposure to a wide variety of areas. “They love diversifying, spreading their risk and making lots of bets, at least some of which are certain to come right. They energetically top-slice or top up portfolio investments and are never creatively idle.

“Indeed, they don’t recognise the concept of creative idleness. Doing nothing makes them feel guilty. ‘Hedgehogs’, on the other hand, are clear as to their objective and are single-minded in pursuing it.” Personal Assets is an unashamed hedgehog: its efforts directed not towards beating an index but looking instead, says investment adviser Sebastian Lyon, “for evidence of longevity and pricing power, not in themes but in companies. Only then can we be confident that future cash flows will be delivered.”

Capital protection, not relative performance remains the priority. The trust is currently divided between equities (44 per cent); cash etc (24 per cent); index-linked (21 per cent), and gold (11 per cent). All this may seem over-cautious to some. But it fits the current apprehensive mood perfectly. Oh, and for the record, PAT has beaten the FT All Share over one year, three years, five years and ten years.

l The trust’s annual meeting will be held at 12 noon on Thursday 21 July at The Roxburghe Hotel, 38 Charlotte Square, Edinburgh. Now you know the questions not to ask.