Benchmarking Discretionary Fund Management Portfolio

Imnoexpert_2

This relates to my other post about an offshore investment involving a discretionary fund manager.

The IFA has produced a nice graph showing  a proposed discretionary managed portfolio outperforming ‘ARC Balanced’ over a 20 year period.

I googled this

‘The ARC Balanced Index is based on 62 discretionary private client managers contributing actual portfolio performance data net of fees. Balanced Asset portfolios are those where the historical variability of returns has been around 40-60% of that recorded by world equities. Balanced asset portfolios tend to encompass the widest range of asset classes. Managers often refer to multi-asset class strategies in this risk category as being absolute return oriented.’

I asked the IFA how this compared to more accessible benchmarks so one could see how the historic return had been and how we would measure success at our proposed twice-yearly reviews. The answer came back was to the effect that it wasn’t possible to compare against other benchmarks as it is not like for like (which I thought was a cop out or disingenuous). He said the 10 year after charges result of 5-6 percent per anum was a good return on a balanced portfolio.

Does anyone have any thoughts on how to measure success? Which, if any benchmarks would be fair (or Like-for-like)? I’m actually more interested in shorter than 10 year performance (more like 1,3,5 years)

aroominyork

First I would look at the equity/bond mix of the discretionary fund. Then I would use a benchmark of a global equity index fund, eg HSBC FTSE All World Index, and a hedged global bond fund, eg Vanguard Global Bond Index. If you prefer a home bias you could combine the HSBC with a UK index fund. I would not benchmark against other expensive fund managers. 

GeoffTF

What does it matter? The past performance was matter of chance and the future performance will be too. What you can be sure of is that you will be paying out lots of money when there are cheaper options.

Cus

I benchmark against what I would do DIY if I wasn't using my current DFM.

dunstonh

If the IFA knows the asset mix (which they should do if they are recommending it) then it will be very easy to select an appropriate benchmark.    

However, that is not a reliable way of deciding whether it is suitable or not.   For example, the benchmark may be based on 65% equities but the portfolio could have 68% equities.  That could be enough to make the portfolio return better.      I am no fan of DFMs (in most cases it is an extra layer of charges the consumer pays for making the IFA's job easier - if the IFA reduces their charge to offset the cost then fair enough but if they dont then you are likely to be paying too much)

Bostonerimus1

Imnoexpert_2 said:

This relates to my other post about an offshore investment involving a discretionary fund manager.

The IFA has produced a nice graph showing  a proposed discretionary managed portfolio outperforming ‘ARC Balanced’ over a 20 year period.

I googled this

‘The ARC Balanced Index is based on 62 discretionary private client managers contributing actual portfolio performance data net of fees. Balanced Asset portfolios are those where the historical variability of returns has been around 40-60% of that recorded by world equities. Balanced asset portfolios tend to encompass the widest range of asset classes. Managers often refer to multi-asset class strategies in this risk category as being absolute return oriented.’

I asked the IFA how this compared to more accessible benchmarks so one could see how the historic return had been and how we would measure success at our proposed twice-yearly reviews. The answer came back was to the effect that it wasn’t possible to compare against other benchmarks as it is not like for like (which I thought was a cop out or disingenuous). He said the 10 year after charges result of 5-6 percent per anum was a good return on a balanced portfolio.

Does anyone have any thoughts on how to measure success? Which, if any benchmarks would be fair (or Like-for-like)? I’m actually more interested in shorter than 10 year performance (more like 1,3,5 years)

This sounds very dubious to me, combine that with the high fees and I would be walking away. Your IFA should be able to take the asset allocation and come up with some numbers...heck anyone can do that using available online tools. The key is to look at risk vs return metics and to marry those up with what you want from your investments. 

JohnWinder

‘Does anyone have any thoughts on how to measure success? Which, if any benchmarks would be fair (or Like-for-like)? I’m actually more interested in shorter than 10 year performance (more like 1,3,5 years)’

Yes, At each review, annual would do, compare the value of your portfolio with the path it ought to be taking if it’s to get you to a ‘target’ value when you switch from accumulation to drawdown. Being on, above or below ‘the path’ will depend on your contributions and the portfolio returns. You might be able to adjust your contributions of you’re not ‘on track’, but you probably can’t easily dial up the returns (without more risk than you’ve already indicated you’re comfortable with). A couple of examples:

If you only had an equity tracker, or that and a bond tracker, you’re condemned to be able to get only market returns (less tracking error and costs). In this case if you’re not on course, you might consider changing funds to trackers (of the same market, since there’s no promise that changing the market you track will improve returns if you thought out the original choice sensibly) with lower costs and less tracking error. That’s about all you can do, apart from sacking your advisor to save costs (not out of spite). 

On the other hand, if you had a portfolio of actively managed funds, and were ‘below track’ at your review, your choices are: jump ship to a different active fund (history shows those funds are commonly not consistent in their ‘good’ or ‘bad’ performance, so that choice would be a poor one); or you could swap to trackers which would save you management fees, one of the few inputs into your returns that you have any control over; or you can press on as the tracker investor has to, but suffer the extra costs she doesn’t have dragging down her returns. 

But, at the reviews, comparing your portfolio returns with a different portfolio’s returns is fraught with risk if it tempts you to change funds/assets, because different funds have their time in the sun at different times.

A problem we all face with such reviews is that 6 months or even 12 months if far to short a period to evaluate the returns of something that is designed to perform well over a 20 year period. But to wait 20 years to find you’ve been sold a pup means the horse has bolted, so better choose the best option from the start, and it’s unlikely to be one that bleeds you fees.

Linton

You cannot meaningfully compare portfolios annually in the way you would like. If portfolio A outperforms portfolio B in a particular year it does not mean portfolio A is better. It could be that there was some unpredictable economic event that particularly benefitted portfolio A. In some parallel universe the event did not happen and B won.

It could be that portfolio B was deliberately more defensive than A because you did not need to take A’s risks.  So although A won, B was the better portfolio.

Perhaps more importantly the comparison tells you nothing about what will happen next year.