A sense of history helps to assess past performance

By Dan Hallett, CFA, CFP on December 29th, 2010

In the Globe and Mail recently, Shirley Won screened for the best and the worst among U.S. equity funds for the decade through November 30, 2010.  A couple of funds on the list struck me as worthy of further comment, which point to the need to dig beneath the numbers.  The first step in this endeavour is simply knowing a fund’s history.  For instance, among the list of worst performers was Ethical American Multi-Strategy.  The current manager, Manning & Napier, has been in charge of the fund for only the last half of the past decade and it’s a firm that we hold in high regard.

Ethical American Multi-Strategy has stayed ahead of the S&P 500 C$ TR index over the past five years, during which Manning & Napier has been in charge.  But they only entered the picture in May 2005.  Prior to that, AllianceBerstein was in charge of this fund, posting weak-enough performance to drag down the entire decade.  But when I look at Manning & Napier’s performance in Canadian dollars and adjusted for this fund’s 2.47% MER, I find that it outpaced the index by about 1.5% annually, net of fees, over the past decade.  In recent years, Manning & Napier managed to do what so few managers could.

Manning & Napier outperformed the index in both bull and bear markets – an accomplishment that has held up in the total of up and down months in addition to the last two big bear markets, starting in 2000 and 2007.  For example, this fund’s 36% loss during the bear market was much less than the index’s 51% loss.  But then the fund rebounded 39% since the end of February 2009, compared to the index’s 35% gain.

Another fund listed in the article is an example in the opposite direction. Dynamic American Value’s 1.4% annualized gain over the past decade far outpaced the index – a showing strong enough to make it the third best performer in its class.  Similar to the Ethical fund, however, lead manager David Fingold has only been in charge of the fund for about five years.  The difference here is that Goodman & Company, as a firm, has run the fund for as long as I can recall but it’s also a firm where changes in individual lead manager are huge.  So, the fact that David Fingold has been in charge for only half of the fund’s strong decade is more than material.

Dynamic may argue that Fingold contributed ideas to the fund when Todd Beallor was the lead manager, prior to Fingold’s tenure as official lead manager.  And that’s a valid point but it’s not the same as having lead management responsibilities so I wouldn’t count it as equivalent to managing a fund.  And I’m not making the case that Fingold isn’t skilled – just that the numbers never tell the whole story.  But circumstances surrounding him or the fund could change the picture a bit in the future given that Scotia recently appointed Fingold to run the Scotia U.S. Value fund.  Further digging is always necessary and it must be done with an eye on the future.

Even where the same manager has been in charge over a particular measurement period, changing circumstances can make the past record a bit unreliable when looking toward the future.  For instance, a significant rise in assets of a fund can make it more difficult to repeat past outperformance.  The longer the period of measurement, the smaller outperformance is likely to be.  Also, ten years ago was also near the peak of the technology bubble so the measurement period itself may be a bit biased in favour of active managers.  Those are just a few factors to examine when using past performance to pick future winners.

This is the reason that we have long emphasized qualitative factors in our manager research.  This emphasis allows us to gain a better understanding of what was behind the past returns and puts us in a better position to judge whether the fund or manager is likely to outperform in the future.