We undertook a thorough review of all three of our Parmenion investment portfolios last month. We wanted to see what had determined the investment returns achieved – our asset allocation (the choice of what types of investment to hold in each portfolio) or the selection of individual investment managers.
We compared the returns achieved with what the returns would have been had we selected passive investment funds where possible. Passive funds are low-cost investment solutions that usually track an index, such as the FTSE 100 share index, but there is no chance of out-performing the market.
The conclusion was that the decisions regarding asset allocation was responsible for most of the return. This means our choice between cash, equities, property and fixed income securities affected outcomes for investors to a significant degree.
What was disappointing was how little was added to returns due to the choice of investment manager. For our Income and Balanced Portfolios the active investment managers added approximately 0.5% to returns after charges, over a three year period. At least they covered their costs!
On balance, we would prefer to invest in passive funds with lower management fees and have the certainty of lower costs whilst giving up the chance of out-performing the market. Don’t forget, we can achieve out-performance with successful asset allocation.
For some investments no passive funds exist. One such investment is a UK commercial property fund. However, for many other investments suitable passive funds are available and over the next year or so we intend to increase exposure to these vehicles, with a useful reduction in cost to be paid by the investor.
One area where our active managers succeeded very well was in our higher risk Tactical portfolio. Here the active managers added around 3.0% to returns achieved over the three years, which was a worthwhile gain. We will stick mainly to active managers in this portfolio. It’s noticeable that specialist areas, such as Emerging or Asian markets, or Smaller Company shares, benefit more from active management – even if it costs more.
Of course, it must be mentioned that past performance is no indication of future performance and investment returns can be negative as well as positive.
