Fund managers are back on the road.
But it’s a bumpy one.
Limited to webinars and Zoomathons during the COVID lockdown years, fund managers are now fronting up to live audiences just as markets hit the skids.
However, as Castle Point portfolio manager, Stephen Bennie, told the in-person Heathcote Investment Partners adviser roadshow last week, even supreme beings can’t always avoid market potholes.
Drawing on research conducted by US firm Alpha Architect a few years ago, Bennie tracked the return of the S&P500 over a 90-year period against a concentrated portfolio of the 50 best-performing stocks during the same timeframe (‘God’s portfolio’).
Simply holding the S&P500 for 90 years would deliver a satisfying return, compounding $1 into $50,000, he said.
As expected God outperformed the index, turning $1 into $12 billion over the 90-year stretch for a miraculous annualised return of 29 per cent.
The God portfolio – rebalanced every five years to include the known best-performing stocks over the following five-year period – experienced some rough patches along the way, though.
In fact, the God stocks at times suffered drawdowns almost on a par with the index (falling about 76 per cent versus the almost 85 per cent collapse of the S&P500 in 1929) and underperformed the benchmark in several one-year rolling periods over the 90 years in question.
Alpha Architect repeated the exercise for a God-based long-short fund and found similar results (albeit with annualised returns of 46 per cent plus).
Claiming god-like powers, however, might not wash with investment committees assessing short-term fund manager performance, the study says.
“Perfect foresight has great returns, but gut-wrenching drawdowns,” the Alpha Architect report says. “In other words, an active investor who was clairvoyant (i.e. ‘God’), and knew ahead of time exactly which stocks were going to be long-term winners and long-term losers, would likely get fired many times over if they were managing other people’s money.”
The theoretical (and maybe theological) research highlights a truism for share investors who are facing the toughest challenge to their faith in markets in many years.
“There has been a testing start to 2022 for equity investors – volatility has spiked on macro and geopolitical news,” Bennie told the Heathcote crowds. “Drawdowns like this are an intrinsic part of share markets – even the amazing ‘God’s portfolio’ gets hit. But staying invested and thinking long-term works: that’s how you use the share market to create wealth.”
Featuring a line-up of 14 active fund managers across multiple asset classes, the Heathcote roadshow included Australian presenters for the first time in more than two years. Previous visitors such as Allan Gray, Capital, Daintree, Fairlight and Premium made the trek across the Tasman along with new Australian additions to the third-party guest list including Schroders, Stewart Investors and responsible investment specialist, Pella.