It is normal to be seduced by headline performance figures in an attempt to judge fund quality. Typically, the industry focuses on cumulative three and five year performance figures when screening funds for selection. However, we believe there is a different way to assess processes and outcomes, the persistency of returns. This tells us how consistent performance has been or the experience a variety of different investors who bought at varying times would have had. Of course, all funds will endure periods of underperformance. That is not up for debate. However, at Canada Life Investments we have undertaken analysis that shows that, since 1 January 2004, the CF Canlife Global Equity Fund outperforms:
57% of the time over 1 year rolling timeframes
73% of the time over 3 year rolling timeframes
90% of the time over 5 year rolling timeframes
We believe this notion of ‘return persistency’ is often ignored by fund selectors, when in fact it should form an important part of due diligence and analysis. Instead of looking at a fixed timeframe, we aim to add value for all investors over a reasonable holding period, regardless of when they choose to invest or disinvest. Of course, there are some managers who stick strictly to one style and – despite it coming in and out of favour – look to outperform over the long-term. Some investors prefer to judge the market cycle and buy a particular style of fund; others prefer a more flexible approach. For those wanting more flexibility, we believe the macro-driven process of the CF Canlife Global Equity Fund enables us to be a good custodian of client money, irrespective of the current market environment.
CF Canlife Global Equity Fund
Our flagship international equity vehicle, the CF Canlife Global Equity Fund has been managed by Mike Willans, Head of International Equities, since 1 January 2004. Mike adopts a macro-driven process, keeping a close eye on economic indicators to analyse and forecast what particular sectors and stocks he believes will outperform in the upcoming months. The International Equities team work very closely together, deciding on their preferred regional investment allocations each quarter. The macro backdrop is then analysed to determine the relative cyclical, growth or defensive bias of the Fund within the regional matrix.
Since the 1 January 2004, this process has delivered fixed term outperformance versus its peers in the IA Global sector. As such, it would screen favourably on a cumulative basis. However, this only measures one distinct time period and represents the likely experience of one investor, as shown below.
Source: Morningstar, as at 30/06/17. Performance since Mike Willans began managing the Fund on 01/01/04. C Acc GBP share class performance, bid-to-bid with net income reinvested. Past performance is not a guide to future performance.
We believe investors should be asking themselves whether they believe the manager has the ability to add value in the future. On this basis, we believe a Fund that displays a high ‘persistency’ of returns and a clearly articulated investment process, can help give investors that confidence.
Quality = consistency + persistency
This would mean that a fund is not overly reliant on one single discrete period and its relative performance is not easily explained by market exposure or beta. In addition, we would expect this performance profile to be exhibited over the longer-term. For example, the CF Canlife Global Equity Fund outperformed in the up market of 2007, as well as in the down market of 2008. More recently, it also outperformed in the more growth-biased markets of 2013 and 2014, as well as 2016. Importantly, this was alpha-driven. For example, the Fund had a twelve month ex-post beta of 1.13 during 2008’s down market and 0.99 during 2016’s up market.
This has enabled the Fund to deliver a consistent level of outperformance. Using time series data from Morningstar we can show that, over the last five years, had a client invested in the CF Canlife Global Equity Fund at any month-end and held their position for 12 months, on average you would have achieved 2.5% outperformance versus the sector over any 12 month period. Furthermore, you would have had a 92% chance of outperforming. The same can also be said for longer-term investors. For those that have invested in the Fund and held it for five years – at any point during Mike’s tenure – they would have generated average outperformance of 9.5%, with a 90% probability of achieving outperformance. The full results are highlighted in the table in the appendix and we have highlighted the historical average outperformance – and the probability of achieving outperformance – of investors holding their investment for one, two, three, or five years at any point during Mike’s tenure below.
Source: Morningstar & Canada Life Investments research, as at 30/06/17. This table highlights that if you had held for 1 year at any time between the 01/01/04 and 30/06/17, on average you would have outperformed by 1.1% and had a 57% chance of generating outperformance. If your holding period had been 5 years, average outperformance would have been 9.5%, with a 90% probability. C Acc GBP share class performance, bid-to-bid with net income reinvested. Past performance is not a guide to future performance.
This table highlights that medium to long-term investors in particular have a strong chance of success. This also points to the fact that the long-term outperformance of the Fund is not down to just one ‘lucky’ period, it has been consistently generated over the last thirteen years.
Our work shows that a number of seemingly good funds will be filtered out when screened for the persistency of their returns. Of course, many investors are perfectly happy in analysing and judging market cycles and seeking out the appropriate funds to gain exposure to the themes that they believe will outperform. However, it is our belief that a manager’s investment process should be thoroughly evaluated relative to what the Fund is seeking to do. For those that seek to react to the prevailing macro environment, the consistency, persistency and quality of returns are what matters for investors, seeking to deliver outperformance regardless of timeframe.
Source: Morningstar & Canada Life Investments research, as at 30/06/17. As an example, if you had held a position for any 2 year period over the last 7 years (highlighted in pink), you would have seen average outperformance of 4.6% with a 92% probability of outperformance. Holding for any 3 year period over the last 10 years (highlighted in blue) would have delivered average outperformance of 4.7% with a 73% probability. C Acc GBP share class performance, bid-to-bid with net income reinvested. Past performance is not a guide to future performance.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance. The contents of this article are not intended as investment advice.
The information contained in this document is provided for use by institutional investors, professional investors and professional advisers and is not for onward distribution to, or to be relied upon by, private investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
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CLI00894 Expiry 15 August 2018