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Investment Strategy
Sunday, August 1, 2010
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Much of the marketing information from investment firms continues to press home the point of taking a long-term view when it comes to investing. “The research and information that we have seen over time lends credence to having a systematic approach to investing,” says Ian de Lange of Seed Investments.

“While we know that there is not one absolute approach to investing, certain activities do lead to reduced performance or at worst capital destruction. One certainty is buying when assets are trading at historically expensive prices.
“Another investing method that leads to reduced performance is buying last year’s winner, with the belief that this outperformance will continue.”
Fairbairn Capital, a division of Old Mutual, produced an interesting bit of information on the negative effect of switching a portfolio into last year’s equity fund winners from 2003 to the end of 2009 and how this has shown to be a losing investment strategy.
Their example is as follows:
Assume a client that is always fully invested in an equity fund. He reviews his portfolio once at the end of each year. If his fund managed a first or second quartile performance during the year, he remains invested in that fund (this assumes that investors in general do tolerate reduced outperformance). However, if this is not the case, he switches into the fund that gave the best return over the past 12 months. Between January 2003 and December 2009, our investor would have invested in the following domestic general equity funds, making switches in 2005, 2006 and 2008, based on this surmise:

2003: Allan Gray Equity
2004: Allan Gray Equity
2005: Old Mutual High Yield Opportunity
2006: PSG Alphen Growth
2007: PSG Alphen Growth
2008: ValuGro General Equity
2009: ValuGro General Equity

They go on to note that, “these are all very good funds, but as the graph shows, this strategy would have delivered below average returns. In fact, it delivered bottom quartile returns during the seven-year period, at above average levels of volatility.”
“Clearly, this investment approach of switching into last year’s winner detracted from performance over this specific period,” notes De Lange.

Copyright © Insurance Times and Investments® Vol:23.8 1st August, 2010
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