FINANCE
Lies, damn lies and statistics
By Middleton Private Capital
The continued sell off in US markets in late October totally erased the gains made by the DOW Jones Industrial and S&P 500 shares so far this year. Yet the marketing of many
fund and investment managers can often tell a different story and past performance figures can be used to improve the look or attractiveness of a fund manager. We are always warned that
past performance is not necessarily a guide to future returns, but how many of us understand how true that statement really is? The reality is, past performance is what it says: in the past. It has no bearing on future returns and should not be used to make a judgement on whether the manager is right for your money. If you analyse a broad range
of performance figures for any UK Unit Trust or OEIC, you can quickly tell how well the manager is really looking after your money and how active or passive they are. For example, with many UK smaller company funds, you can clearly see annual returns that mirror what the markets do. In 2001 and 2002, global markets lost money and most investment managers followed this pattern. During this time, we were in
the aftermath of the tech boom crash and the terrible events of 9/11. Fund growth returned in 2003-2007 as economic conditions and markets recovered but in 2008 the pattern repeated itself with the start of the global recession and heavy losses for managers that again followed the markets.
SO WHY DO THE FIGURES
MATTER? Having the right data and knowing how to interpret it greatly increases your chance of selecting the right money manager. In early 2012, if you looked at
the three-year performance statistics for one particular high profile fund, you would have seen an average annualised return of 22.6%. This looks attractive on the surface but if you look at the performance over one year, the return was one per cent. If you then consider the five-year annualised
MORAL OF THE STORY? Past performance is just that: in the past. Figures can tell the story that a manger wants to tell and while it may serve as a comfort to know what a fund’s past performance was, you need to look at how the figures are packaged up and presented. Of far more importance is
having a clear understanding of what the manager is doing now, how they are dealing with current economic and financial changes and how they are preparing for the next 12 months.
76 business network December 2018/January 2019 It’s important to have the right data
‘An average performance figure does not show you the true performance in one individual year’
average from 2007 to 2012 the performance figure reduces drastically to 3.98%. The worst-performing UK
Equity Smaller Companies Fund over five years to date has provided growth in that same period of 31.2% giving an average of 6.24%. When you take a closer look at the figures, you will see: • 19.1% in 2017 • 4.2% in 2016 • 2.8% in 2015 • - 0.8% in 2014
So far in 2018, the fund has
lost 2.5%. Seeing that the fund had
enjoyed a good performance in 2017, you could be forgiven for thinking that at the start of this year it was something worth investing in. However, the bigger picture tells a different story.
The power of three – updates from the Bank of England
By Pamela Wright (pictured), Bank of England Deputy Agent for the East Midlands
I’d like to flag three recent announcements by the Bank. All of them relate to money in one way or another. One was about the official interest rate set by the Bank; one was about the new fifty pound note; and one was about the future of money itself.
THE OUTLOOK FOR INTEREST RATES On interest rates, the Bank’s Monetary Policy Committee (MPC) recently provided its latest assessment of the economy and the path of interest rates needed to bring inflation back to the two per cent target over the coming few years. The MPC thinks the economy is now close to full capacity – my
colleagues and I hear from businesses in the East Midlands for example that they are struggling to recruit staff or that they are struggling to find premises in which to grow. That means that if the economy performs as the MPC expects, interest
rates may have to rise gradually from 0.75% towards around 1.5% over the next two or three years. Of course, there is still a great deal of uncertainty about the outlook for
the economy because of Brexit. As a result, the path of interest rates set by the Bank will depend on the nature of future trading arrangements and whether there is a smooth transition to them. Importantly, whatever happens, the Bank will set interest rates in a sustainable way to ensure that inflation returns to target, while supporting
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