How to pick a good fund manager: check he is driving a daggy car
As we approach the holiday season, time for a blog on a lighter tone, but one with a serious message.
This is a picture of my car:
And this is a link to “Sensation Seeking, Sports Cars, and Hedge Funds”, a recent academic study by researchers in Florida and Singapore on what you can predict about a Fund’s performance from the Fund manager’s car.
To quote from the abstract of the article:
“….fund managers who own powerful sports cars take on more investment risk. Conversely, managers who own practical but unexciting cars take on less investment risk. The incremental risk taking by performance car buyers does not translate to higher returns. Consequently, they deliver lower Sharpe ratios….. In addition, performance car owners are more likely to terminate their funds, engage in fraudulent behaviour…. and succumb to overconfidence.”
Figure 1 - Growth of AU$10,000 to November 2016*
As my partner Chad Slater and I put most of our financial wealth in the MGOF at launch and have never redeemed a unit, we are pretty happy with this. However we are particularly proud to have achieved this despite what some people have seen as an almost obsessive focus on risk management.
As the old academic joke goes, there is no such thing as a free lunch, even for MGOF investors. So this focus on risk management in a strongly rising market means that we have spent quite a lot on insurance premiums, but made very few claims!
But we have no regrets, and we don’t think our fellow investors should either. The reference above to Sharpe Ratios may sound arcane, but points to something that is at the heart of what we think makes Morphic special.
For a full explanation of what a Sharpe Ratio is, please turn to the Investopedia description. However, the simple description is that a higher Sharpe ratio indicates you have taken less risk to generate your returns.
The chart below shows the MGOF’s Sharpe Ratio compared to other Global Equity Funds commonly used by Australian investors. The Sharpe ratios shown are calculated based on net returns since Morphic's inception.
Figure 2 – Sharpe ratio vs relevant peers from August 2012 to November 2016*
We are pleased to say that we have delivered Morphic investors returns (after fees) very close that of global markets, but with less volatility than these markets themselves. Only one of the funds we track has generated better risk adjusted returns, and most of the better name brand Australian managers have taken significantly more risk to make their gains than is generally realised.
The process overseen by our Head of Risk and Macro, Geoff Wood means we have generally managed to spare our unit holders some of the ‘rollercoaster ride’ investors have had with other funds. We are conscious that investors can rarely plan when exactly they may need their money back. It is therefore very important to us that we try to protect as much capital as we can in downturns, in case any of our investors need to redeem after the markets have been soft.
As the disclaimer on every publication by a fund manager is required to note: “Past performance is no guarantee of future returns.” However what I can guarantee our investors is:
- None of my colleagues drives a flash car
- I won’t be taking any money out of the Fund to replace my ten year old Subaru Forrester any time soon, and not just because I am the proud father of two teenage daughters with “P” and “L” plates
This story won’t change even if we make a motza from our short on Tesla, where as we have often remarked, we think the shares are overvalued even though we love the cars.
We hope all members of the Morphic Community have a well-earned break over the holidays. Thank you to all the respondents who participated in our recent survey.
We will be working shifts in the office here looking after the Fund, as your money never sleeps, so do call us if you have any questions. We will resume our regular blogs in the New Year, when we will also be sending out our regular Half Year Report.