Since we believe it is the asset classes themselves, rather than active investment manager wizardry that generate portfolio returns, our basic aim is to help our clients to access as great a proportion of these returns as possible.
This may sound like a fairly simple and logical objective, but most investors are unaware that they rarely receive close to the maximum available returns. Indeed, they often receive a far lower return from the asset classes than was owed to them, for three principle reasons:
- The investment methodology employed by active managers
- The high charges levied by active managers
- A lack of investment discipline shown by the individual investor
Detailed analysis of the damaging investment methodology typically employed by active managers would be too lengthy and technical to explain here and thus it would not be appropriate to do so. However, a look at the latter two points would be worthwhile.
If we begin with costs, the straightforward fact is that the costs of investment have a direct impact on the returns from investment and to take an everyday scenario, the lower the costs of, say, your pension investments, the more money you will eventually have in your fund to help you achieve your desired lifestyle and wider financial planning objectives.
With regard to investment discipline, one of the most common mistakes investors make is losing focus on the principles of investing and not maintaining their long-term strategy, particularly when economic and market conditions experience difficult times.
This is because they succumb to the human yet irrational emotions felt when there is a heightened perceived risk to their money. In so doing, they put their faith in the 'wisdom of crowds', by taking the 'safe' option and doing what 'everyone else' is doing, in withdrawing from their investment strategy and retreating to a place of perceived safety whilst stock prices are low, until the markets have 'come back up again', whereupon they will reinvest their money when stock prices are high.
The trouble with this is that, not only is this approach contrary to the basic investment principle of 'buying low and selling high, it is also essentially an attempt to time the entry and exit of markets and it is a proven fact that this is impossible to achieve with any consistency. Professional money managers have never been able to do it, so there is very little chance of a private individual being able to do it either.
The net result of this indiscipline is that investors usually either realise losses and / or miss out on the available returns when the markets rebound. A good example from recent history is the turbulence on the UK stock market between September 2008 and March 2009. Many people who exited the market at its lowest point in March 2009 will have made the irrational decision to turn nothing more troublesome than a 'paper loss' into an actual loss - and in some cases, of considerable magnitude. On the other hand, those who maintained their long-term strategy and discipline will have experienced a very healthy return indeed throughout the rest of 2009.
To put all of this into perspective, the following table shows the damage the issues outlined above can cause to an investor's returns over time. It shows:
- The pure returns delivered by the asset classes over the period 1992 - 2003
- The return a typical actively managed equity fund delivered in the same period as a result of a misguided, expensive management approach and high fees
- The return an average investor actually received from a typical equity fund, as a result of poor investment discipline
Comparison of Equity Market, Equity Fund and Equity Investor Returns, 1992 - 2003 (UK)
|
Annual Return |
Growth of every £1 Invested |
FTSE All Share Return |
8.99% |
£2.81 |
Average Equity Fund Return |
6.93% |
£2.21 |
Average Investor Return |
4.91% |
£1.78 |
(Note: Data kindly provided by Dimensional Fund Advisors. Past performance should not be regarded as an accurate guide to the future.)
As you can see, the figures tell an alarming yet elementary story: that keeping costs down, being able to stay focused on a long-term strategy and having the resolve to make rational decisions in difficult times is vital to a successful investment experience.
At Chamberlyns, we do not want our clients to be 'average' investors, who have the same uncomfortable and disappointing investment experiences as so many people do, which is why we construct low-cost, passively managed portfolios which aim to capture as much of the available returns as possible. We also provide the ongoing support needed to maintain investment discipline through both good and difficult times.