Monthly Archives

June 2021

The unhelpful noise of short-term performance

Investing is simple, but not easy.  The decision to invest in the first place requires foresight, as well as the discipline to deny oneself spending today so that you don’t have to eat own-brand baked beans out of the tin in retirement.

The second is deciding how much you want, need and are able to invest in equities, which will act as the drivers of positive portfolio returns, above inflation, that will help fund future spending goals.  Getting this right is key and where good advisers can add value.

Next an investor needs to decide the broad structure of their equity and bond components of their portfolio.  A good place to start for equities is the structure of the global markets, which defines the basic country, sector and company weights and offers broad diversification. As Eugene Fama, who won the Nobel Memorial Prize in Economic Sciences, said in a recent webinar:

‘You need to be able to talk your way out of a market cap-weighted portfolio’.

By this he means that any decision to move away from this structure needs to be based on evidence and provide a good chance – although never the certainty – to improve the risk and return characteristics of this portfolio.  That is a bit trickier and requires a reasonable degree of investment knowledge.  Occam’s razor suggests that the simplest answer to a complex problem is often the most effective.  It certainly is in investing. Start with market capitalisation.

The final step is picking funds to implement the strategy.  Yet for many DIY investors, this is one of the first steps they take, heading to the ‘best buy’ fund lists in the Sunday papers or some investment website.  Here is where the fun and danger start.

Some funds – usually measured over short time frames such as three years – can have great looking track records.  At this point many investors’ decisions are driven by common behavioural biases.  Hindsight bias is the most obvious – it’s easy to identify a fund that has done well in the past, but difficult to pick one that will do well in the years ahead.  Extrapolating the past into the future is rarely a successful strategy.  The fear of missing out is strong but needs to be resisted.  Overconfidence in the ability to pick a ‘market-beating’ fund manager goes against the grain of the bulk of the evidence we have to hand. Over the past 20 years, for example, over 85% of all US equity funds failed to beat the market index and only around one third actually survived the whole period![1]

Different parts of the market do well at different times, but no-one really knows who the future winners are, not even the professionals.  Naïve investors take good short-term performance as a sign of skill.  Yet the reality is that much of the seemingly ‘good’ performance may be down to the part of the market that has performed well that happens to gel with the style of a specific fund.   There is an old industry saying that markets pick managers, not the other way around.  ‘Good’ performance may also simply be luck.  You need at least 16 years of performance data to be 95% certain that skill rather than luck is the driver of outperformance, even for highly skilled managers[2]. Three- or five-year performance records are largely worthless in identifying good funds.  Yet that is where best-buy lists and many IFAs tend to focus.

Spot the ‘dog’

One example of the noise investors face is the ‘Spot the dog’ report published by Bestinvest (owned by Tilney) every six months – and often highlighted in the Sunday papers – naming and shaming a list of funds, coined ‘dogs’, that have performed poorly relative to a broad market benchmark over three years[3]. Simultaneously, ‘pedigree’ funds are celebrated based on strong recent outperformance. By and large the ‘dogs’ were value funds (made up of cheaper stocks relative to some fundamental company metric, like book value or earnings), and the ‘pedigree’ funds were growth-oriented[4] (more expensive companies) in their latest report.  Over the three years, growth stocks in general outperformed value stocks.  Without this context, investors risk making decisions based on hindsight, picking investment styles that have done well and potentially lucky managers within those styles. So far this year, many of the UK ‘dogs’ have outperformed the ‘pedigree’ funds, as value stocks have performed better than growth stocks[5].

‘Expert’ picks

Investors Chronicle also tends to provide an annual Top 100 Funds list by broad investment category.  Its 2012 global growth list identified nine funds and investment trusts[6].  Over the past ten years, only two out of the nine selected funds beat the market index, but did so handsomely.  They are both highly concentrated, high conviction funds holding just a handful of companies.  One of the funds suffered a fund-specific 50% fall within the period, which would have taken a strong stomach to live with.  The other has experienced a couple of years of explosive growth, driven by a handful of companies and one electric car manufacturer in particular!  Will they continue to do so well in the future?  No-one knows, not even the managers of these funds and certainly not the pundits creating best buy lists.  And that is the point.  Basing an investment strategy on ‘I don’t really know’ seems a bit like gambling.

Capturing the market return with a well-diversified, low cost, systematic fund makes good sense and allows investors to ignore the best-buy and fund tips tables noise. Thank goodness for Occam and his razor!

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.


[1]     S&P Dow Jones Indices – US SPIVA Report Year end 2020.

[2]    An information ratio measures how much skill-based return a manager delivers relative to a representative benchmark and how much relative risk they took to achieve this.  A ratio of 0.5 (i.e. half a unit of return for each unit of additional risk taken on) is deemed to be outstanding.

[3]    Bestinvest (2021) Spot the Dog.

[4]    Albion Strategic Consulting April 2021, Governance Update 21.

[5]    Refer to footnote 4.


Off-Payroll Working Northern Ireland

Will HMRC accept CEST result?

Since 6 April 2021 large and medium-sized organisations, based on the Companies Act criteria, have had to determine whether or not a worker supplying his services via their own personal service company would be treated as an employee if directly engaged. This replaced the IR35 rules for these larger organisations.

HMRC suggest organisations use their Check Employment Status for Tax (CEST) tool on their website to check the worker’s status, although that is not obligatory. The tool is an interactive database of questions and will normally provide a ruling after 15 to 20 questions depending on the answers given about the contractual relationship.

See: Check employment status for tax – GOV.UK (

HMRC have recently confirmed that they will be bound by the result of the software provided the information is accurate and it is used in accordance with their guidance.

See: ESM11010 – Employment Status Manual – HMRC internal manual – GOV.UK (

HMRC have also stated that they will not stand by results achieved through contrived arrangements that have been deliberately created or designed to get a particular outcome. They would see that as deliberate non-compliance, and potentially levy financial penalties.

Note that the end-user organisation is required to issue a Status Determination Statement to the worker with a copy to any agency to be passed to any fee payer in the labour supply chain making payments to the personal service company.


David 1, Goliath 0

It may have passed you by, but last week a little-known hedge fund called Engine No.1 (David) scored a direct hit with its shareholder slingshot to the forehead of one of the world’s mighty oil companies ExxonMobil (Goliath), stunning its adversary.  Despite only owning 0.02% of ExxonMobil, it put forward a motion at the latter’s AGM to put nominees on the board of directors. It gained two of twelve seats.  Quite a coup.  Its simple rationale was straightforward:

‘We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation’.
Engine No.1 website

In 2010, ExxonMobil was the largest public company in the World, with a value of around US$370 billion, but in 2020 it ignominiously dropped out of the Dow Jones Industrial Average index and today has a value of around US$250 billion.  That is an awful lot of shareholder value destroyed, given how strongly the broad US market has performed. Last year the company made a loss of around US$25 billion, but the CEO still got a pay rise! ‘Go figure’ as our American friends would say.

So how did such a small investor have such a large impact on this behemoth?  Simple. It co-opted major pension investors, such as the California State Retirement System, and the giant fund managers Blackrock and Vanguard – representing the investors in their funds – to vote in its favour.  Ironically perhaps, the Norwegian ‘oil’ fund, which was funded from profits from oil extraction, voted with Engine No.1. It is now one of the world’s leading investors focused on sustainability.

And why would they do that?  In large part because of the growing focus on the climate crisis – and sustainability more broadly – by investors in their funds, who want their voices to be heard. It also comes down to hard-nosed capitalism.  Companies such as Exxon, who appear blind to the train-wreck they face when no-one wants or needs to buy oil, potentially risk losing further value, in some investors’ eyes.  They believe that they can help these oil-tankers to change direction more quickly towards a more sustainable harbour and reap the financial rewards of doing so.  Engine No. 1 was pretty honest about it[1]:

‘Our idea was that this was going to have a positive impact on the share price…What we’re saying is: plan for a world where maybe the world doesn’t need your [oil] barrels.’
Chris James, Engine No.1 Founder (from FT)

Perhaps the key message of Engine No.1’s move is that, even though our individual impact may be small, collectively we can make a difference, through the consumer choices we make and the power of the markets to penalise companies that are out of sync with the values of the day and to reward those who adapt.  From an investment perspective, that means remaining invested in companies in order to have our say, via the fund managers who manage our money.

It may be David 1, Goliath 0, but this game has a long way to go.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1], Hedge fund that beat ExxonMobil says it will have to cut oil output, May 27, 2021