Most investment research suggests that diversification is the number one rule investors need to keep in mind.
I used to agree with this but after some years in the industry think there is an even more important rule and the rule is "trust nobody". It is pretty well known that research from the "sell side" i.e. the output from stockbrokers, financial advisers, fund managers etc has to be taken with a grain of salt the size of California. Some are better than others. This column looked at a paper from Andrew Smithers a while back which argued that the first rule for stock broking research was that all news is good news. LOL. But one area of the investment management industry whose reputation has managed to remain relatively unscathed has been that of investment consultants and actuaries. This is a little bit surprising because, whilst these people generally have a higher level of education than the industry average they are, like everybody else, burdened with the need to sell something.
Consultants are employed by institutional investors to help with asset allocation and choosing fund managers so a working hypothesis might be that, given they are used by institutions to pick fund managers, their research will be biased to show fund managers in a good light, the rationale being that if the consultants showed that fund managers underperformed the market index institutions would increase their weightings to passive funds which would mean less business for the consultant. The "pro fund manager hypothesis" seems all the more reasonable after reading a recent report on the NZ pension fund industry by a consulting group.
The report suggested that local pension fund managers investing in Australasian and international shares added value in the longer term. This sort of unlikely claim inevitably attracts the attention of the Statistics Police (SP) and accordingly this column enlisted the SP's help in putting these claims under the microscope. The consultant's report looks at the performance of its pension fund database over twenty years and concludes that
Pension funds managing Australasian equity portfolios have outperformed by an average of 3 per cent pa over twenty years.