Update No. 97 – 25/01/13

Today, I’ll revisit one of the very earliest posts I made, back before the fund even commenced.  I will do so for two reasons.  Firstly, I made the claim in the 2013 Half Year report (.pdf) that nearly 80% of equities focused funds fail to beat a suitable benchmark after fees are factored over a medium-term period. Secondly, because I had an e-mail exchange with a blog reader who is a financial advisor – he asked me for the data I offered to provide in this November 2010 post.  This caused me to update it as it was over 2 years old.  Given I had already done the work & I believe it makes for the sort of information regular readers will enjoy; I figured I’d use the figures as part of the basis of this week’s post.

The result was pretty much as expected.  Once again a figure very close to my 80% prediction (80.71% in fact) failed to beat the indices over the last 5 years.  My data source was once again the comsec managed funds list.  I selected the risk profile ‘aggressive’, this should get primarily products that it is fair to compare with the ASX200 benchmark (I could quite reasonably throw the 45 ‘growth’ funds in with the group also – I didn’t).  I then cut away the funds without a 5 year performance record, this took the 285 results down to only 197 (remember there is a ‘survival bias’ that positively skews results in favour of the managed funds as the weaker performing funds are closed/consolidated).  I have then ranked the funds based on their 5, 3 & 1 year % pa return. The outcomes were as follows:

1.         38/197 or 19.29% beat the -0.11% annualised return of the ASX200TR over the 5 years

2.         71/197 or 36.04% beat the 3.29% annualised return of the ASX200TR over the 3 years

3.         80/197 or 40.61% beat the 17.96% annualised return of the ASX200TR over the 1 years.  The 5/3/1 decline above shows the powerful effect of ‘survival bias’ on results.

4.         There is a slight inverse correlation between fees and performance, the top 98 funds averaged a 2.03% cost ratio & the bottom 98 a 2.25% cost ratio, so you do not get what you pay for & higher fees do not mean better returns.

5.         If you felt you must invest in this type of funds, the highlighted (in yellow) top 5 would be the only ones I’d seriously look at (top 5 based on average position over 1, 3 & 5 years), every disclosure document you see will say that ‘past returns are no guarantee of future returns’, in my view the best indicator of likely future success is a track record of past success.  These five probably won’t top the list next year or in five years, but I’d wager they’ll still be in the top half (caveat – unless the primary stock-picker has changed).

For regular readers I have put the data in a very basic spreadsheet (.xlsx).  There are no ‘bells and whistles, just the basic data as it came from comsec, sorted for simplicity.  Feel free to e-mail me if you have any queries.  I look forward to the time when we have 5 full years behind us and we can legitimately compare, based on the last three and five years, I believe we would top this list.  Based on the ‘1-year’ comparison, we are in the top 10 or 15%, I believe over 5-years EGP will be much higher than that.

December housing starts for the US were released this week.  The report indicated (.pdf) 780,000 starts occurred in 2012, but the ‘annualised’ rate in December was estimated at about 950,000.  I would hazard about one million US housing starts will occur in 2013, which whilst still around 50% below the rate of building required to keep pace with population growth and dilapidation, is still sufficiently high you should see a marked difference in both the employment participation rate and the unemployment rate by the end of the year.  The question is in how this effects global, but more particularly (for fellow holders) Australian businesses.  In my view, the stabilisation and relatively moderate but sustained gains in the Case-Shiller Home Price Indices, along with increasing numbers of home-owners with ‘negative-equity’ returning to positive equity positions in their homes should continue to improve US consumer sentiment.  Improving employment conditions should also help sentiment.  The US and Chinese economies (the two most important in the world) will have a sound 2013 in my view, and given current valuations and the economic conditions in Australia, I would expect the Australian indices will on the balance of probabilities be likely to close 2013 with an above average year behind them.  I don’t really go in for forecasting levels, but I do think another above average year is likelier than not, though there is still about a 25 or 30% probability of a negative finish.  As I have mentioned many times, years of above average performance make it harder for EGP to beat the indices, but I am hopeful 2013 will extend our ‘winning streak’ – Tony Hansen 25/01/13

EGP Fund No. 1 Pty Ltd. Up by 7.68%, leading the benchmark by 3.66% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 31.08%, leading the benchmark by 22.68% all-time (April 1^st 2011).