The evidence for FoxPlan's Investment Philosophy

This week senior financial adviser and head of investment at FoxPlan, Warwick Walker delves in to our investment philosophy and the hard-data that supports it.

We understand that many investors we work for have little interest in the nuances of investment management. However, we know you do care about your goals and that you trust FoxPlan to allocate an appropriate portfolio to help you achieve your goals.

What we are often asked though, is how we choose funds, funds managers and why we don’t use other particular managers? So this month we want to provide more information about why we have the investment philosophy we subscribe to, the difference that makes to the fund managers chosen and the difference we think it makes for you.

At FoxPlan, we don’t recommend investment managers that do the following (known as active fund managers):

1. Believe they know more than markets and concentrate portfolios into a few selections
2. Try to time when to get in and out of markets
3. Charge high fees commensurate with their claims about skill

You might be thinking, why not try to time markets? Why not concentrate my portfolio into the investments I think are likely to beat the market?

Whilst some fund managers have achieved high returns through these actions you might be surprised to know there is overwhelming evidence which shows attempts to manage investments this way does not work for most investors.

When measured objectively, managers that use these techniques on average, have lower returns than a comparative market benchmark. In addition, while this is typically true over one year periods, it is almost always true over 10 to 15 year periods.

Standard and Poor’s (S&P) measure the returns of ‘active’ managers against an appropriate benchmark every year and publicly share the results. The chart below shows the percentage of these fund managers that outperform their market benchmark across several countries:

graph 9906db0a2804513c

Cutting through the data – in the US only 16% of actively managed funds performed better than their comparative market benchmark.

We’ve highlighted the US to show that regardless of population or market competition the average returns of active managers are lower than their local benchmark and, on this basis, we have no reason to expect New Zealand would be any different.

The data from S&P also shows that it doesn’t matter whether investments are in large, small, inexpensive or growing companies – the average active manager does worse than the market in which they invest.

What this means for you

A lot.

Using US market data we can see the average active fund underperformed the benchmark by 1.4% over the last 15 years. On a 15 year average, the S&P 500 returned 7.93%, actively managed funds returned 6.5% over the same timeframe.

1.4% may not seem a lot but in real figures, it adds up. If you had invested $1,000,000 in 2004 you would be $570,000 worse off compared to the market benchmark. If you had invested $500,000 in 2004 the difference would be $285,000. These sums are not inconsequential!

So why doesn’t everyone follow our philosophy

To earn that extra return you must do something very simple, yet very hard. You need the discipline to ignore the chatter, marketing, media and noise from investment managers; those touting their recent (usually only one, three or at most five year) track records and performance, and the promise of riches they will bring you if you switch your portfolio to them.

You also need to ignore the relentless headlines predicting doom and gloom and stay disciplined in the markets. The 15 years this data collected over spans 2004 – 2018, a period not exactly the easiest in which to stay invested.

And that is the FoxPlan investment philosophy. It’s about time in the market, not timing the market.

If you would like to learn more about investing with FoxPlan, please email to arrange a meeting with one of our investment advisers.

The views and opinions expressed in this newsletter are not intended to be a personalised service for an individual retail client. The views and opinions are general in nature, may not be relevant to an individual's circumstances, and constitute class service only. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser of FoxPlan Limited.
A disclosure statement is available on request, and free of charge.

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