Wellian Weekly 27.09.2021

Defining Consistency

I do an awful lot of fund manager research per annum. I interview hundreds of them per annum. I have spent thousands (if not tens of thousands) of hours in my career looking at charts and tables of funds all with the same goal – seeing whether a fund is suitable for inclusion in the portfolios of clients. As a multi manager I have the ability to be cynical and dismiss funds for a plethora of reasons, but at the end of the day my objective is to deliver to clients the most appropriate portfolio for the accepted level of risk, or desired level of income, or cost, or a whole other range of requirements. Fund “A” might be acceptable for some clients, but not others.

Of course, we try to meet the objectives of clients, but we aim to do this using our investment approach. If our style and that of the client don’t match then we just simply don’t get the privilege to manage their wealth. Therefore, what is our style, what is our approach?  In one word, it is “consistency”.  The trouble is consistency is an incredibly subjective word and means so many different things to different people.

Examples of consistency and questions surrounding “consistency”:

  • A fund manager only invests in 40 companies
    • What if the turnover is 100% per day?
    • What if the 40 stocks are all technology stocks today and all industrial stocks tomorrow?
    • What if the 40 stocks are large cap today and small cap tomorrow?
  • A fund manager that only invests in stocks with a PE ratio between 10 and 15
    • What if the portfolio has 20 stocks today and 150 stocks tomorrow?
    • What if the portfolio is 100% European stocks today and 100% Japanese stocks tomorrow?
    • What if the characteristics of the market(s) moves and there are no stocks that meet the objectives?

There are many more examples, but where in one breath you can confirm consistency, in another, you can contradict it, and performance is a key area to look at.  For instance, what time frame(s) are you looking at? What metrics and measures are used to define consistency?  This article is written not to answer the questions, but more to ask them; to suggest them because after all, a fund that over each of the last five calendar years has delivered fourth quartile returns relative to their peers is actually consistent!

Take the last 5 years as an example – do you look at the last 5 calendar year returns? Do you look at 24 six-month time periods? Do you look at 60 individual months? Do you overlap time periods – for example the first time period is the 12 months to the most recent month end and the second time period is the twelve months to one month ago?  We’ve all heard of lies, damned lies and statistics, but in this world where we have an ever-growing database of numbers, how we use them and interpret them can give very different outputs.  Are you more interested in absolute or relative numbers?  If a fund has given 10% for the last 5 time periods under review (monthly, quarterly, half yearly, yearly etc etc) is it consistent? If the average fund in those same 5 time periods gave -10%, -20%, +150% -15% and +20% does that change your view on what is consistent?

If a fund marginally beats the benchmark in four of those five periods, but has a poor return in one of those five, does that mean the fund is no longer consistent? What if you were looking at 10 time periods – how many periods of poor numbers before you consider the fund inconsistent?  What if the underperformance was within 1% of the average? Does that make you look at things differently than if, for instance, the underperformance was 3% or 5%? Does the degree of underperformance change if you are looking at a 12-month period compared to a 36 month period?

What about if a fund outperforms the benchmark, or delivers positive returns over all time periods under review, but does so with 100% more volatility than the benchmark, how does that make you act with regards to suggesting whether the fund is consistent or not? 

Turning to outperformance – if a fund historically has given you an outperformance of between 0% and 1% on a regular basis and then starts giving a 3% to 5% number, does this make the fund less consistent even though the performance is stronger?

How we all think of these questions, and how we answer them (and many more) goes to show that the idea of consistency is very appealing, but when things are inherently inconsistent (like the capital markets) having an approach to fund selection, portfolio construction, asset allocation, client reporting and so on that can be articulated and presented in a manner and backed up with proof really helps with defining something that is both hard to define and absolutely subjective.

In this profession of ours, with lots of moving goal posts and differing expectations of what the future may bring, consistency is something noble to strive for; it is easy to talk about, but hard to achieve. There are times when your fund managers do not deliver; there are times when market movements are erratic. This inconsistency can be infuriating at times. The best thing to do at times like these is to look through the short-term noise and have a portfolio that continues to meet the long-term objectives – sometimes that can be through a concentrated portfolio; sometimes through a diversified one. Sometimes through a dogmatic manager; sometimes a pragmatic one.

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