Broker Check

How Well is Your Money Performing For You?

March 30, 2015


“The operation was a success but the patient died”.

We don’t like the usual answer about investment per performance which is to use an index (like the S&P 500) as a benchmark to see how well or badly the fund has done.

Investment results must be quite specific for an individual’s needs. There is no point in losing money and explaining that we have outperformed.

It is the medical equivalent of “the operation was a success but the patient died.”

Benchmarks are often used to generate fees and to prove that a lousy performance is actually not that lousy.

Every investor would like to do better in absolute terms, by comparison with last year and in relation to any peer group.

Everyone wants more and without too much risk.

Wants are unlimited, resources are limited and investment management is the path chosen to maximize returns from a given amount of capital.

But we first need to know where we are going and what we expect for ourselves. Not having an objective reveals EITHER a lack of self esteem OR that you are 14 years old.


“Financial services would be a great profession if only we did not have any clients”

It may come as a surprise to some investors to learn that many fund managers really would rather not deal with them.

The vast majority of financial services providers have one objective, which is to generate fees from client accounts by providing a product which is sold.

When we are shopping for any product, at the supermarket or elsewhere, it is always cheaper and better to shop with a list and not to buy on impulse.

Therefore, the first and most important step is to define a specific objective that fits the investors needs and wants at a specific time now or in the future.

An investment objective is where we want to be. A goal is the speed with which we get there.

Along the way there are plenty of back seat drivers and some of our own making, called fear and greed.

The best way to ignore a back seat driver is to have a route to the objective. Without a route any road will get you there.

The objective should be quite specific, personal and directly relevant to the owner of the capital.

For some investors this may mean keeping 100 per cent of their money in cash and earning little or no return.

Your goals and objectives have little in common with a benchmark manufactured by someone who does not know you from a bar of soap.


The Australian Sovereign Wealth Fund “The Future Fund” ($120 Billion Aust Dlrs) ignores benchmarks. You can read more about their activities below.

However, they are very clear on their objectives for which they are responsible.

By comparison, too often the financial services industry ignores the specific result required by the individual and uses a series of benchmarks designed
not for the individual but for the benefit of the service provider. Often benchmarks or indexes are created for the specific purpose of creating a product which
can be sold and where the manager is able to “outperform”.

For example, an equally weighted portfolio may be created to outperform a market capitalization weighted portfolio after an index is created to track an equally weighted portfolio.

There are dozens of examples of indexes being created so that portfolios can be created for investment.

In other words, the tail often wags the dog and the specific needs of the investor are ignored.

The industry has created “hedge funds” for the specific purpose of getting around benchmarks and where the investment of client funds is not constrained by benchmarks (except for the purpose of collecting fees).

Target date funds are another way of getting around the tricky problem of explaining why the future will always be better than present.

Benchmark funds, hedge funds, and target date funds may all be on our shopping list but none of them are any use unless we first know our objectives and goals.

Speaking at the Association of Superannuation Funds of Australia (ASFA) Investment Interchange in Sydney yesterday, the Director of the Future Fund, Mr Neal, said “The technology we’re using to turn savings into investment return is pretty outdated,” and the industry is still doing things the same way we were doing them a long time ago.

He said there is a ‘peer group’ mentality of institutional investors which results from investors in Australian retirement accounts being typically unengaged.

The Future Fund has a unique approach to investment of funds which avoid the “silo” effect that occurs elsewhere.

First, only one of the board members had direct investment experience before joining the board of the Future Fund.

“The rest are all successful corporate people and they didn’t really have a ‘this is the way it’s done’ [attitude],” he said.

According to Mr Neal, when the Future Fund was founded in 2006 and the investment committee began discussing possible investment constraints, the board responded by saying: “Why put any on yourself?”

As a result, the Future Fund’s performance is not measured by a benchmark, he said – although the investment committee must report to the board monthly.

“That means if we’re doing a bad job [the board] know we’re doing a bad job,” Mr Neal said.

“[The absence of a] benchmark just completely frees us up to go and build the right portfolio, and explain to the board why it’s the right portfolio,” he said.

THEREFORE The real answer to any question about investment performance, is not the traditional benchmarks the industry observes but what is going to work for you.

John Kimber