Ed McKnight: The dangers of chasing winners

Sometimes what seems like the best option isn’t always the best. 

When it comes to investing and KiwiSaver, it may seem like frequent swaps to whatever seems to be bringing in the best return is a good decision, but that may not be true. 

A recent study looked at what would happen if someone switched their fund managers every year, moving to the company that got the highest return over the last twelve months – turns out, they’d actually make less than if they’d stayed. 

Ed McKnight joined Jack Tame to chat about the study and the dangers of chasing winners. 

LISTEN ABOVE 

See omnystudio.com/listener for privacy information.

Episode Transcript

Speaker 1 (00:07):
You're listening to the Saturday Morning with Jack Team podcast
from News Talks.

Speaker 2 (00:11):
A'd be it's a classic mistake and investing, whether it's
with your KEII saver, whether it's another whether it's with
another managed fund you've got keywis will often look at
whatever went up in value last year and think, oh,
that is the fund I should be going with.

Speaker 3 (00:26):
But Ed mcnight o, personal finance expert from Opie's Partners,
is with us this morning with a cautionarytail about trying
to chase winners.

Speaker 4 (00:34):
Hey, Ed, good morning.

Speaker 1 (00:36):
Check.

Speaker 4 (00:36):
It's great to be here.

Speaker 3 (00:37):
Yeah, nice to be chatting with you. So run us
through this recent study. It's absolutely fascinating.

Speaker 1 (00:42):
Yeah.

Speaker 4 (00:43):
Well, as you know, my wife is a financial advisor
and she's much smarter than me, so you can imagine
what we talk about around the dining room table. So
the other day she says, come look at this graph, Love, Come,
come everyway, squisite this and I say to her, Angela,
explain it to me. So there's this wonderful New Zealand
company called Concilium, and they did a piece of analysis
that looked at what would happen if every single year

(01:06):
since twenty eleven, every year, you sat down, you said, okay,
which managed fund provider got the highest return last year?
And let's say it might have been Milford. Okay, I'm
going to switch my fund across to Milford. Then a
year later you sit there and say, okay, well who
got the best return last year?

Speaker 1 (01:24):
Oh?

Speaker 4 (01:24):
Oh, okay, it wasn't Milford this time, it was Fisher Funds. Okay,
I'm going to switch to Fisher Funds. And then you
keep doing that year after year until today, so about
sixteen odd years. And they looked at how much money
you would have made if you did that, and then
they said, well, what if you did the exact opposite.
What if every year you sat down and you switched

(01:44):
back or you switched to the fund that had the
lowest return. And what they found is that if you
switched to the fund manager with the lowest return each year,
you made slightly more money than if you switched to
the winner. And I've got even better. Even if every

(02:06):
single year you just picked a random one, just close
your eyes while you're on the Sordid fund website and
you just pick a random one each year, you didn't
actually make that much less money than if you'd just
chosen the best or the worst. So what I'm trying
to get across here is that just because of fund
has a really good return one year, and the fund

(02:27):
managers they love to they love to advertise their returns.
I was walking through the airport the other day I
saw asb advertising their returns. The fact that a fund
manager got a good return last year or over the
last three years tells you absolutely nothing about the return
that you might get over the next three years as well.

Speaker 2 (02:50):
Yeah, that's so interesting, isn't it. I love that the
ones that performed worst last year did slightly better than
the ones that performed best. So what should you be
considering If you are thinking about trying to find the
right fund or thinking about changing fund, you'd be looking
at things like fees, right.

Speaker 4 (03:08):
Well, fees is are very important. One. The first thing
you'd want to think about is are you going to
go for an active fund where you've got really smart
analysts there trying to beat the market. Or are you
looking for a lower cost index fund where they are
just going to follow the market and buy whatever is
in the market. For instance, you might have an S

(03:30):
and P track of fund. Now, people have different views
on this over the long term. In the States, the
index funds have tended to provide higher returns than those
that are actively managed, because if you've got a what's
called a low cost track of fund, then the fees
are going to be substantially lower, and so that's where
you get that additional margin. And typically what we've seen overseas.

(03:53):
My understanding is it's a little bit different in New Zealand,
but certainly overseas, what we've found is that active managers, yep,
they might win a for a couple of years, but
then for some of the other years they don't do
as well either. And so looking at fees as there,
I think the other thing that you've got to consider
and sort it has actually got a really good website
for this is what sort of fund are you actually

(04:14):
going to go for?

Speaker 3 (04:15):
Now?

Speaker 4 (04:15):
A lot of keywis will know, well, there are aggressive funds,
we've got growth funds, we've got balanced funds. But what
you need to do is just scratch the surface a
little because on Sorted's website you can see, well, of
a growth fund, what percentage of their assets are actually
in growth versus income. I'll give you an example, Jack,
because I looked at this literally the other week. There

(04:36):
are some growth funds in New Zealand that call themselves
growth funds, and they've got sixty seven percent of their
assets in growth assets, so that it'd be stocks and
equities and those kinds of things. If you look at
a balanced fund and you say, well, which ones have
the most growth assets, the balanced fund with the highest
amount of growth assets was about sixty four percent.

Speaker 3 (04:59):
Right, Oh wow, it's pretty cool.

Speaker 4 (05:01):
My point here is that a growth fund is not
a growth fund. They're not all the same. Some are
going to be much more aggressive than others. And what
you want to do is look at, well, what's the
percentage of growth assets in there?

Speaker 2 (05:15):
Yeah, that's so interesting. That's a really good way of
doing it.

Speaker 3 (05:17):
Thank you very much, appreciate your time and expertise is
always in McKnight from Opie's Partners with Us This Morning.

Speaker 1 (05:24):
For more from Saturday Morning with Jack Tame, listen live
to News Talks' b from nine Am, saturday or follow
the podcast On. iHeartRadio