IN my last article (February issue) I stated that, in the course of future articles, I would be looking in more detail at areas where some extra risk and excitement can be built into your longer-term investment planning.
Before looking at riskier or alternative investment areas, however, I want to spend a little time considering some investment fundamentals and how we at the St James’s Place Partnership endeavour to achieve consistent, superior, investment performance over time.
Everyone has to make a decision on how much of their money they want to hold on deposit or in other low-risk forms and how much they want to commit to the stock market in the quest for long term growth.
How well your stock market-based investments perform will make a crucial difference to how much money you will have to spend in the future, as well as how much you will have to pass on to your family.
The best chance…
So what can you do to give yourself the best chance of achieving good performance from the money you invest? The answer is to find superior investment managers to handle your money.
If you look through investment records, you will see that some managers have performed much better than the average manager – and some managers have performed much worse than the average manager.
You should remember that past performance is not indicative of future performance. The value of an investment, as well as the income from it, can fall as well as rise.
Is past performance the key to selecting the appropriate manager for your money?
Unfortunately, it is not as simple as that. While it is undoubtedly true that some investment management firms have achieved significantly better performance than others over long periods, you can by no means assume that this will continue in the future.
For example, the individuals who achieved that performance may have left the firm, or structural changes within the firm may reduce the prospects for future performance. They may have had the ability to deliver better results with relatively small amounts of money, but may not be able to continue to do so with larger funds under management, or the conditions that suited a manager’s investment style might be quite different in the future.
There is also the problem of timescale. Over what period do you assess a manager in deciding whether to put money with him – or whether you should take it away from him?
A relatively poor manager may outperform even the most talented one over a period of a year or two, because unexpected economic developments may work out in his favour or because he is simply lucky over that period.
Unpredictable
By the same token, a manager of outstanding ability may well underperform over a period of one or two years because of unexpected circumstances – or perhaps even because he has made the right decisions while the market has not yet recognised the validity of his views.
Since many unpredictable factors influence the way share prices perform over a short period, even the best managers will make wrong decisions some of the time.
Indeed it is said that a good manager is one who makes the right decisions more than 60% of the time (source: Stamford Associates).
Yet you do not want to wait five years to find out whether you have chosen an untalented manager, or perhaps a manager who has lost his earlier flair and has entered into a terminal decline.
The reality is that, in the final analysis, choosing investment managers is an art as well as a science.
But to give yourself the best chance of selecting an investment management firm that will provide you with superior performance in the future, you have to look at many factors, such as: the particular individual who will be handling your fund and the strength of the team supporting him; whether the firm employs its own investment analysts or relies on the analysts of other firms; the investment style, principles and disciplines within the firm and the extent to which it adheres to them.
Having selected a firm, you then need to keep it under continuous review, to be reassured that the same individual is looking after your fund and that the firm is continuing to follow its stated principles and disciplines.
No certainty
And, since there can be no certainty in an uncertain world, no one should commit all of their investments to one manager. To minimise the risk of a particular manager losing his or her touch, or being in a field which turns out to be unfashionable, you should spread your money amongst different managers, ideally managers with different investment styles.
This is where it starts to become rather difficult. With dozens of investment companies and thousands of authorised funds to choose from, how do you begin the selection process?
At St James’s Place we believe that we have a simple and distinctive solution and in my next piece I will explain the St James’s Place approach to investment management, how this compares with going to another adviser and, for those of you lucky enough to have relatively large amounts of investment capital, how our approach compares to running your own portfolio through a stockbroker.
- For further information or to discuss any aspect of financial planning, contact the author, a founder member of The Ellis McComb Partnership, 3 Mortimer Street, Birkenhead, Wirral, CH41 5EU; telephone 0151 650 6520, email ellis.mccomb@sjpp.co.uk; website www.sjpp.co.uk/ellismccomb.
