FUND ANALYSISPage Summary: How tactical asset allocation can be used to analyse exchange traded funds, in theory and practice |
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TheoryIs it all a lottery? Recent research by the Financial Services Authority, among others, shows that past performance is an unreliable guide to predicting which fund manager will outperform his peer group. However Investors RouteMap offers another way of beating the averages, and one which is much cheaper than switching managers.The table below the significance of choosing the right asset classes and importance of tactical asset allocation in fund analysis by changing those choices from time to time. It is based on the 1800+ funds available within UK pension funds that are surveyed in Money Management magazine. Data from the issues of September 1990 and 2000 are used to show the average compound growth rates for the each major asset class, assuming reinvestment of dividends. |
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Total Returns by Asset Class Sorted with best performing asset over the past decade at the top.
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Examples Apply tactical asset allocation to back winners. North American funds were the best performing class of investment over the past decade, generating 20.9% total returns on average each year, and rated 1st out of 18. However over the previous decade returns were only 14.2%, despite the fact that the average managed fund did much better (15.4% to 1990, but down to 12.5% to 2000). This placed North American Fund 5th out of 8 in the earlier period, a below average result.Apply tactical asset allocation to avoid losers. Far East Fund including Japan were a disappointing investment, producing sub-par annual returns of only 8.1% in the past decade, well down from the 18.4% p.a. of the previous decade, in which Far East Fund including Japan were the second best performing asset. |
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Practice Play tactical asset allocation within fund management groups. Stick with one - switching managers can cost as much as 5% on single premium payments, and considerably more when saving by regular installment, especially when the plan is young. If your existing vendor only has a limited range of funds available, increase your options for tactical asset allocation by making all future savings into a second vendor's plan with a broad range of specialist funds. Use the Investors RouteMap tactical asset allocation software to decide which types of asset and markets look attractive. Ignore the managed funds, and select four of the remaining specialist funds within your plan, whose markets Investors RouteMap rates highly. If security matters highly to you, at least one should be a fixed interest or money market fund. This should provide a good balance between the need for diversification and the opportunity cost of closet index-linking. See our Lifetime Asset Allocation Tool to help identify what your own DIY Balanced Fund should comprise. Review the monthly Summary Tables in the RouteMaps to see when recommendations on the various markets change and switch between the appropriate specialist funds when appropriate. These include growth and value investing, smaller companies, technology, gold and resources. This is likely to occur on average twice a year for each fund and should cost you only a modest administration charge, in you switch within the same family of funds. If you need help, we can act as your Independent Financial Adviser. |
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