Chant West

A different perspective on multi-sector product performance

In previous articles we have reviewed the performance of multi-manager multi-sector products by comparing them with single manager products. This time we look at the performance issue again, but from a different perspective.

A common way to judge a product’s performance is to compare it with its benchmark. In a survey it is necessary to use one commonly accepted benchmark for that class of product, rather than the actual benchmarks applicable to each individual product. While not perfect, this provides a practical basis for comparing the competing products’ performances.

The shortcomings of this approach become more obvious when we look at diversified products that invest in multiple asset sectors. That’s because each product has its own strategic asset allocation, so the problem of finding an acceptable common benchmark becomes greater. A further complication for our survey is that we report the performance of diversified products after fees and tax whereas benchmarks are calculated before fees and tax.

In an effort to deal with these matters we are pleased to announce that, from this issue forwards, we are going to use the performance of the Vanguard LifeStrategy suite of diversified PST products as benchmarks for the diversified products in our survey.

The Vanguard products provide a useful yardstick as:

they adopt a passive style of management, and provide a good proxy for index performance;
there is a Vanguard product with a strategic asset allocation similar to those of the other products in each classification of our survey; and
the returns are available on an after fees and tax basis, i.e. the same way we report performance.

Using the new benchmark

The inclusion of the Vanguard data is only meant to provide a broad performance guideline. Any direct comparison with another product should be treated with caution, as any given product may have a different strategic asset allocation and/or the strategic asset allocations may have changed during the review period. These differences are likely to be the major factors in any performance differences, particularly in the short term.

Further, caution is required in using the data to form conclusions about the overall performance of active versus passive multi-sector products. Any comparison should be looked at over a period of 7 – 10 years so as to incorporate a full asset cycle. At this stage, the data available only allows us to look at the past 5 or 6 years. We will be looking to include longer term data as it becomes available.

Performance history

The performance of the multi-manager products in our survey relative to the performance of the relevant Vanguard product is summarised in Table 1 below.

Table 1 – Multi-Sector Product Performance for the 5 Years ended 30 September 2004

	Median Multi-Manager Product	Vanguard Index Product	Excess Returns
High Growth Portfolios	6.2	5.4	0.8
Growth Portfolios	5.9	5.6	0.3
Balanced Growth Portfolios	5.7	5.4	0.3
Conservative Growth Portfolios	5.6	5.3	0.3
Note: Performance is net of investment fees and tax.

The data shows that:

The median products have outperformed the benchmark
In each category the median multi-manager product has outperformed the relevant Vanguard index product on an after fees and tax basis over the past 5 years, albeit that in 3 of the 4 categories the difference is not that significant; and
Allocations to international equities have been a major factor in relative performance
The products in the upper quartile have outperformed by a considerable margin. Table 2 sets out the strategic asset allocations of the funds included in our Growth category (growth assets of > 65%, <= 75%).

In the December 2003 issue we wrote about the strong performance of industry funds, observing that the funds’ investment options generally had a lower allocation to international equities. In September 2004, all but one product in the upper quartile of the Growth category was an industry fund option. These funds show a much lower allocation to international equities (offset by a much higher allocation to alternative assets) and their relative performance can be closely correlated to their asset allocation to international equities – refer Table 3.
Performance relative to Vanguard has been quite volatile
The excess of the average multi-manager returns over the Vanguard returns for Growth and Conservative Growth portfolios are shown in the charts below. They cover the 6 years ended 30 September 2004, being the longest period for which sufficient data is available.

The excess returns from active management show considerable volatility and long periods are required to get a clear view of what is happening.

There appears to be a gap between the performance of asset sector products and diversified products
The excess of the median multi-manager performance for the major asset sectors over the relevant Vanguard index product are set out in Table 4 below. The returns are gross of fees and tax and so are not directly comparable with the results for the diversified products shown above.

As the table shows, the excess returns come principally from Australian and international shares which explains the higher excess returns for High Growth portfolios.

However, the outperformance of the median Growth product (0.3% pa) is somewhat less than what might be expected given the high weighting to shares and the excess returns delivered by the single sector share products. While part of this would be attributable to the difference in fees for active and passive management and to tax, the magnitude of the difference would suggest that there are other factors at play. These may include unrewarded TAA decisions and implementation problems.

The inclusion of the Vanguard data provides another insight into the performance of diversified multi-manager products. At the same time, it reinforces the importance of identifying differences in the strategic asset allocations of competing multi-sector products in attempting to judge their relative performances.

Table 2 – Strategic Asset Allocations of Growth Portfolios as at 30 September 2004

	Aust Shares	Int'l Shares	Property	Other	Growth Assets	Income Assets	Total
Upper quartile	34.4	20.4	10.9	4.7	70.4	29.6	100.0
Overall average	33.6	24.5	9.5	3.2	70.5	29.5	100.0
Lower quartile	33.1	27.4	9.3	1.4	71.3	28.7	100.0
Vanguard	37.0	25.0	8.0	0.0	70.0	30.0	100.0
Note: Includes only those products with a 5 year performance history. The overall average is the average of all such products, the upper quartile is the average of the products included in the upper quartile, and the lower quartile is the average of the products included in the lower quartile.

Table 3 – Impact of International Equities for the 5 Years ended 30 September 2004

	Allocation to Int'l Equities	Performance vs Vanguard
Upper quartile	20.4	+2.0
Average	24.4	+0.5
Lower quartile	27.4	-0.6
Vanguard	25.0

Growth Portfolios

Average Multi-Manager Returns v Vanguard

Conservative Growth Portfolios

Average Multi-Manager Returns v Vanguard

Table 4 - Sector Fund Performance for the 5 Years ended 30 September 2004

	Benchmark Vanguard Index	Product Fund	Multi-Manager Product Median	Excess Returns
Australian Shares	9.0	9.1	10.6	1.5
International Shares	-3.8	-3.4	-1.9	1.5
Australian Listed Property	14.3	14.7	14.9	0.2
Australian Bonds	6.6	6.8	6.8	0.0
International Bonds	8.2	8.2	8.6	0.4
Note: Performance is gross of investment fees and tax.

Disclaimer

© Chant West Pty Limited (ABN 75 077 595 316) 1997 - 2013. You may only use this document for your own personal, non-commercial use. This document may not be copied, reproduced, scanned or embodied in any other document or distributed to another party unless you have obtained the prior written consent of Chant West to do so.

The information above is based on data supplied by third parties. While such data is believed to be accurate, Chant West does not accept responsibility for any inaccuracy in such data. Past performance is not a reliable indicator of future performance. The products, reports and ratings do not contain all of the information that is required in order to evaluate the nominated service providers, and you are responsible for obtaining such further information.

This information does not constitute financial product advice. However, to the extent that this document may be considered to be general financial product advice then you acknowledge that you have been provided with a Financial Services Guide and Chant West warns that: (a) Chant West has not considered any individual person’s objectives, financial situation or particular needs; (b) individuals need to consider whether the advice is appropriate in light of their goals, objectives and current situation; and (c) individuals should obtain a Product Disclosure Statement from the relevant fund provider before making any decision about whether to acquire a financial product from that fund provider.