The most common question I’m asked is: “In your photo, why is your head upside down?” Readers often query too why a supposed expert is not retired after three decades of investing (see my first column for the answer).
I also receive hundreds of emails about portfolio measurement. Not only has the absence of returns data in the table below annoyed people, so do the performance numbers most fund managers provide.
Sorry for not benchmarking myself until now. The reason was the combining of my two employee pensions into a self-managed fund last year. This muddied historical comparisons.
Hence the focus on headline returns in my quarterly reviews. Even these were compromised when I could not put excess cash to work. As far as possible, however, I’ve tried to scrutinise my asset allocation decisions using hard numbers.
Now things have settled, measuring my performance is easier. This is unfamiliar territory. As a professional asset manager, half my career was spent making sure this was hard for clients to do.
Over the years, however, those of us who invested money in single regions or asset classes ran out of places to hide. Old tricks such as excluding fees or cherry-picking time periods were regulated away.
For example, I used to manage billions of dollars across multiple funds for various US institutions. But each portfolio was measured against exactly the same global ex-US equity index — as were those of most of my peers.
But balanced (or multi-asset) portfolios are trickier when it comes to analysing returns. Like my pension fund — and yours probably — they can invest in a wide range of global assets.
Which single benchmark to use? It is a good question and unfortunately there is no right answer. That is galling for purists. But it also means balanced funds often get away with murder.
Many — for example the category winner at Wednesday’s Professional Advisor Awards 2024 in London — simply concede that “no financial instrument or index represents a fair benchmark”.
Instead, they suggest, “the performance of the fund can be assessed by comparing its total return to funds with similar return and/or risk objectives”. Everything is relative, in other words.
Another popular approach was among the best balanced fund nominees: targeting the UK consumer price index plus 3 per cent on the basis that only “growing your investment above inflation” counts.
True, but I have two issues with these benchmarks. They feel hamstrung when inflation is low and equities are booming. Like for most of my life. Conversely, delivering CPI-plus seems fanciful if prices soar.
What I do like about inflation-based indices, however, is they aspire to make me money in absolute terms. Price levels generally rise. A blended mix of reference assets, by contrast, can always decline.
And who ever hires a portfolio manager to deliver a smaller negative number than the index? Of course the likes of equities and bonds go up over time. And as big liquid asset classes they do make for easy benchmarks.
But then the question becomes: how much of each? Again there is a wide variation in how the asset management industry has answered this for balanced funds. Each method has its benefits and flaws.
In the US, for example, almost 90 per cent of balanced assets have 55 per cent or more in equities, according to Morningstar data, so the most commonly used indices tend to reflect this. In the UK it’s more like half of them.
Such a dispersion of risk profiles is reflected in the index names that you will often see balanced funds measured against, such as “aggressive”, “cautious”, or my favourite, “adventurous”.
Ooh la la! But again there are different ways of constructing mixed benchmarks. Some combine just two asset class indices — for example, 60 per cent in equities, 40 per cent in bonds.
Others, such as Morningstar, reference the real-life weightings of the funds in their universe across multiple assets. Then they rebalance everything to align with a range or risk profiles.
The first approach is clean but simplistic — an absolute benchmark. The second is more representative but the index runs with the herd. Even if you outperform it, you don’t know whether everyone should have done better.
Certainly, balanced managers prefer being measured against each other. That is because their returns, compared with a simple mix of equity and bond indices, reveal the same chronic underperformance suffered by most active managers.
I am a hypocrite on this topic, as I’ve admitted before. I believe in passive investing but then attempt my own asset allocation. Madness. I should just decide on my weightings (with automated rebalancing) and walk away.
To be fair to my ex-colleagues though, measuring their balanced funds against benchmarks comprising two passive indices (such as MSCI World for equities or Bloomberg Global Aggregate for bonds) is harsh.
Balanced funds report their performance after fees, and there is a spread to pay whenever managers trade. Both add up to hurt returns. Blended indices suffer neither of these penalties.
To compare apples with apples, the industry should really be measured against benchmarks comprising exchange traded funds or similar real-life passive vehicles. Then the true opportunity cost or gain of an actively run balanced fund can be known.
What index do I want to beat? Not a positive return one, such as CPI-plus. After all, it is the danger of falling prices that leads to higher returns — otherwise known as a risk premium. And I don’t care about volatility enough to have a boring mix of equities and bonds as my main benchmark.
No, the best returns historically for investors come from US equities. Seems to me, therefore, that unless I can beat the S&P 500 — in sterling to match my liabilities — I shouldn’t bother.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__