We are all told, and indeed sign disclaimers that shout it quietly from the last page of the financial plan that past performance is no indicator of future performance. Yet it is what absolutely all investors look at. There are no other measures to go by, because future performance is just a guess for the manager and a game of wait-and-see for the index ETF.
With the index ETF, you shall receive the market return, (minus the fee). No more, no less. (Okay plus or minus the tracking difference too, but I have ignored that for now, in the major ETFs this is statistically irrelevant for retail investors). The market return is what all the individual stocks in your chosen index have made, or lost, put together to give you one aggregate figure.
You get this every year, whether things are soaring, tanking, retracing, or going sideways. The index ETF has a certain chill factor about it. A cool customer. One can sit back and relax because what will be ... will be. Easy to handle, you simply put your boots up on the table of inevitability, light your hands-free investing cigar and let things roll.
Being actively invested brings more expectations.
The "game" is that your fund manager can beat the index using skill, experience, trading strategies and research. The theory is that they will, by selecting a few carefully researched stocks from the pack, rather than boxing the whole deck itself, make you more money. Some of them do brilliantly.
The partner of a Sydney girlfriend of mine recently won Australian Fund Manager of the Year. He pulled rabbits from hats when all around him were getting shot to bits.
His fees may or may not be called pinky-finger-in-a-vice level. Clients loved it and he was rightly acknowledged for a fabulous year. I admire him too.
But 12 months is still only 12 months.
It does not always go this way. Some more local, large active funds have not beaten the indices they compare themselves to. In some cases they have underperformed for over five years.
That is, you paid your chunky fee, then lost anyway, five years in a row. Does the 10-year return make up for that? Or the 20-year? How long do you hang in there? There is no perfect answer, and you won't find me warbling on that index ETFs pave a sure-fire path to the happy tablet factory of investing, either. What I am saying to the active guys is, if you say you can - show us the evidence.
¦Caroline Ritchie is a former AFA, sharebroker and portfolio manager. She runs Investment Stuff, a sharemarket based investment coaching service. Visit her at www.investmentstuff.co.nz This column is not personalised financial advice.
