The merry-go-round of launching and retiring funds is one that the international adviser industry ha...
The merry-go-round of launching and retiring funds is one that the international adviser industry has become increasingly accustomed to over the years.
It is one of the most straightforward ways of ditching those pesky bad track records that can dog even the most well-respected of investment houses. As often as not funds are closed (or merged - the effect is the same) for genuine reasons: they are too small to be either profitable, which typically means that they will not offer great returns as the fixed costs of running a fund swallow up performance - Forsyth's Global Technology Fund is a case in point; its mandate is too limiting, given the demands of modern investors; or there is another fund run by the manager which has a very similar mandate and it makes no sense to keep them separate - see New Star's aggressive streamlining of its onshore range.
However, it is also very easy for fund managers to use the closure of a fund to protect its reputation. When two funds are merged, which track record is kept? It is not likely to be the worst.
It is still the case that a manager can fool investors simply by running many similar funds and then dragging out the one that happens to have performed best recently. This is how it is possible for every one of the funds we see advertised to claim 'top quartile performance over three years'.
When efforts were made to clamp down on this sleight of hand - for example with the introduction of GIPS - it only encouraged clever marketing managers to find ways around the rules. So if GIPS requires the manager to show the performance of all similar funds in their stable, and across standardised time periods (to avoid the cherry picking of both dates and funds), the manager closes the failing fund down instead, or changes its mandate sufficiently so that the previous track record can be dropped.
There is an analogy here with small-cap indices - another area worthy of scrutiny. Small companies that underperform are likely to go bust and leave the index, so that only the successful ones remain in. Big caps that underperform tend not to die, but just hang around like a head cold, dragging down the index, providing a more accurate estimate of what the average investor has returned.
So, survivorship bias is everywhere, making every new entrant to the market feel like Aladdin, having entered the cave of wonders. But unless advisers spend the time properly researching both fund management groups and the full histories of individual managers, their investors, like Aladdin, could find themselves, as it were, in a cave without a genie...
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