personal finance

What sporty cars say about your fund manager


What car does your wealth manager drive? If it’s anything sportier than a beige Volvo, be wary. It could mean your money’s being managed by someone unduly over-confident (and you’re being charged too much).

That’s because belief in driving ability is the best-known manifestation of a cognitive bias (a kind of built-in misjudgment) known as “illusory superiority”, or the “Lake Wobegon effect”, after the fictional town created by author Garrison Keillor where “all the children are above average”. That very delusion — that all can be above average — characterises it. For example, a 1981 study of drivers in the US by Ola Svenson of the University of Stockholm found 93 per cent rated themselves in the top 50 per cent for driving skill.

Now, a new book suggests just such a bias has long been present in fund managers and the advisers who select their funds. In Clueless, author and financial adviser Brian Dennehy presents his own research going back to 2005, which finds 92 per cent of managers are “mediocre at best”. And he is not over-stating it: that 92 per cent is the proportion whose funds that could not even make it into the top 40 per cent of performers 60 per cent of the time. But are fund managers cognisant of this? Apparently not: “the evidence has mostly been ignored for decades,” his book suggests.

So is there any reason to believe that private bankers or wealth managers are any more clued up? Yes, insist all of those asked by FT Wealth if their fund performance, or fund selections, can be better than average.

“Absolutely,” says Oliver Gregson, head of the UK, Ireland and Nordics for JP Morgan Private Bank. “What sets us apart? We have a global team . . . giving our clients exclusive access to . . . unique insights and updates.”

Edward Park, Brooks Macdonald’s investment director, also cites resources: “We have almost 100 people involved in investment research.”

Fahad Kamal, senior market strategist at Kleinwort Hambros, says it is the patience to find managers with “repeatable processes that . . . identify undervalued assets” that ensures his clients win. John Goodall, WH Ireland’s head of private client research, suggests a scientific approach can “beat the mediocrity trap”: first, a quantitative screening of funds using a variety of metrics, including return and standard deviation; then qualitative screening — meeting the manager.

Swiss bank Lombard Odier has designed its own proprietary system to ensure fund performance does not “drift” from meeting client needs. “We have designed PrivilEdge, a platform dedicated to externally managed strategies,” says chief investment officer Stéphane Monier.

Experience makes a difference too, suggest others. Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management, argues: “With years of experience over multiple market cycles, we believe private bankers like Pictet can add value to fund selection.”

Even companies that focus on exchange traded funds, by definition producing index-average returns, argue they can contribute to above-average performance. James Norton, senior investment planner at Vanguard says: “Far from being a path to mediocrity, the lower the cost, the better the chances of investment success.” Equally, Peter Scharl, head of iShares EMEA Wealth at BlackRock, points out that trying to pick the “best funds” does not necessarily result in the best portfolio, “as the economics of wealth management shifts from pure product selection to building smarter portfolios”.

Stamford Associates even advocates psychology to beat other fund managers: “We consider an investment manager’s personality as a critical input.”

Students of maths as well as the mind may have noticed that nine wealth managers have claimed to be better than average. So how many actually are?

Two claim to be, on recent numbers. JP Morgan Private Bank says its equity and fixed income funds platform “outperformed median managers and passive alternatives over the last five years”. Lombard Odier says, “our fund selection has been able to add roughly 1.5 per cent of additional annual performance (net of fees) to our client portfolios over the past six years.”

But can they all be better than clueless in the longer-term? Dennehy is unequivocal. “No,” he says. “The very up-market wealth management groups are not brought to account because there is no easy way to compare performance.” As with brilliant drivers, you just have to take their word for it.

Matthew is reading . . . 

The Credit Suisse Family 1000 report, which finds that family businesses where founders or descendants hold at least 20 per cent in direct shares or voting rights continue to have stronger top-line growth, higher margins and less reliance on external funding than their non-family peers.

@MPJVincent





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