After I wrote my 10-year review of unit trusts an industry person suggested that I review the Public China Select Fund (PCSF) alluding to it being an example of a fund with good performance.
Actually, it was more like a dare than a suggestion because this person who refused to go on the record challenged me to be “intellectually brave” to review this fund showing its “5-year returns”.
There are a few problems with this kind of hubris because at the very basic level, one fund can’t represent your caliber as a fund house. Fund managers’ performance is also largely a matter of statistical probability: very few funds stay on top all of the time. It’s no fault of the fund manager, it’s just probabilities. So to me, the larger question is not how specific funds have performed, although that’s important, but how unit trust holders were advised getting into those funds.
There are of course other reasons why just looking at one fund and looking at only 5-years may not be intellectually the bravest thing to do. The question here is not how the PCSF performed. It is more whether out of all the funds in the world, a China fund or an Australian fund or a British fund is right for you.
Also, a certain fund might have performed super-well in the last 5 years but you must make sure you were lucky enough to get in exactly 5 years ago. Any nutty suggestion of not looking at the longer term, say a timeframe of 10 years, is exactly the kind of advice that helps prosper fund managers because it encourages people to trade in and out of funds. “Who looks at 10 years?”, was the comment. Well, I do and I think you should too. In fact, I look at the verylongrun (newsflash: name of my blog) of 20, 30, 40 years and more, basically any time frame that will fit into and up to the rest of your life.
Having said that, I don’t think reviews are a bad thing. In fact, I’m in favour of them. Listed companies get reviewed by analysts all the time so why not funds? Also, fund managers themselves prize highly the work of independent analysis to avoid being duped by some gung-ho bullshitting listed company or its investment banking representative. Fund managers know this kind of bullshit goes on. So fund managers who want to read honest research about companies they’re going to invest in should themselves be open to a critical review of their own funds for the betterment of all unit trust holders and the wider investing public.
Now let me clarify that I’m not going out of my way to single out any particular fund or fund house. I do however think that the biggest houses have an imperative to sell responsibly and lead the way in accountability and shaping how the industry can advise responsibly. CIMB-Principal, for example, manages RM68b and Public Mutual about RM70b and counting. Together these two houses alone handle a humungous chunk of the private unit trust market valued at over RM400b. They are literally public companies in every sense of the word and how they conduct themselves is a matter of public interest and public policy.
And in the state of where the investment advisory industry is today, the professionals know more than the person on the street. This so-called information asymmetry can lead to very evil outcomes for the consumer-investor who put their money where someone else’s mouth is.
So back to reviews: this is NOT about value judgments or about sentiment. It’s NOT about why if you bought a car, you should prefer a Ferrari to a Honda to a Proton. It’s about an objective look at the specs of a car and deciding whether the price-to-specs ratio (to use investment industry jargon) serves you well.
The investing conversation needs to drastically change from “what should I buy?” (likely standard answer: “this fund which will make you tons of money”) to “why should I buy it?” (recommended answer: because it suits your risk-return profile). The former is a marketing pitch and the latter is an advice.