Out Performing the
Market - Obtaining Higher Returns
Performance Between Asset Classes
The Key to
Achieving Your Investment Goals
Explanation of Total Return
How Fund Managers Maintain
Consistent Real Long-term Return on Your Investments
Out Performing the Market - Obtaining Higher Returns
Active fund managers
attempt to provide higher returns than the market, adjusted for risk and fees charged.
Because most markets are relatively efficient, this is not an easy task. But FundSource
believes that high quality active managers who apply coherent, disciplined investment
strategies in a rigorous way have the potential to outperform (the 'market') over the long
- Active management can potentially protect
the portfolio against structural changes in the markets or catastrophic events. Passive
management is a captive of the underlying assumptions used in selecting the particular
choice of assets (generally market capitalisation based). If these assumptions are flawed,
passive management has no means to react to those flaws.
- Active managers can take advantage of an
expanded investment opportunity set (beyond what is contained in the index). For example,
in international equities active managers have added value by investing in emerging
markets and small-to-medium sized companies not represented in global equity indices.
- They can capitalise on market
inefficiencies, rapid growth and change in investment markets.
- Like all investment theories, the notion of
market efficiency would be undermined if everyone believed it and only invested in index
funds. Active managers are required to make the market efficient. They are incentivised by
the prospect of making abnormal gains.
In saying this, actively
managed funds are not for everyone. This is one of the fundamental advantages of
investing in managed funds - the individual investor may invest in any one of a high
number of funds that aim to meet their investing objectives.
For more information on
passive and active funds please find information here. You will need
to be a member to access this information.
Managed funds, whether
active or passive, have been proven to provide a consistent long-term return on your
investment. This is outlined below.
Performance between Asset Classes
History confirms both the above figures and the variance in returns between
investment sectors. As the time frame for investment increases it is with a greater degree
of confidence that we can say that these relationships hold true.
As an example, looking at the
US bond and equity (share) markets going back to 1900;
Over rolling one year
periods shares out-performed bonds 72% of the time
Over rolling five year
periods shares out-performed bonds 89% of the time
Over rolling ten-year
periods shares out-performed bonds 99% of the time
Over rolling twenty-year
periods shares out-performed bonds 100% of the time.
Conversely over certain time
horizons significant deviation from long term norms can occur often due to totally
unexpected events, e.g. 1987 stock market crash, Iraqi invasion of Kuwait in August 1990,
the Internet bubble collapse 1999-2000 and the terrorist attacks on the United States in
The Key to Achieving Your Investment Goals
is through Asset Allocation
FundSource believes that investors long
term objectives can be achieved over time through the careful structuring and tailoring of
investor's portfolio asset allocations. Asset allocation is the relative share in a fund
of the four investment assets described above - equities, property, fixed interest and
Our confidence is in this position is
based on our understanding of the relationship between asset classes and our ability to
forecast longer term structural themes within asset allocation strategies (for
example a shift to a sustainable low inflation environment).
According to a number of studies, the
asset allocation decision exercises a proportionately large impact on overall performance.
Analysis of US pension plan performance found that the strategic asset allocation decision
explained as much as 91.5% of the variation in an investors performance, significantly
more important than industry weightings, stock selection and market timing.
Explanation of Total Return
Put simply, this graph illustrates that 91% of total return variation can be explained by
asset allocation. This has provided an opportunity for professional fund managers to
master this area of investing, thus to a large degree controlling return variation.
Fund Managers are Experts at
Effective Asset Allocation
A fundamental reason why Fund Managers are
so effective at providing long term, consistent returns on investments is that they are so
proficient at effective asset allocation. In mastering asset allocation, Fund Managers may
to a certain degree control investment return variation.
Combining effective asset allocation with
the inherent advantages of managed funds including professional management and stock
selection, diversification, buying power and convenience,
the reasons for investing in managed funds become very compelling.