Measuring portfolio performance

Friday, 30th June 2017 12:37 - by Eric Chalker

To become a better equity investor it is essential to measure performance, in percentage terms and against the passage of time.  Use of graphs may sometimes help in judging when to buy or sell, but they are no substitute for actual figures, calculated over time.  For those who do this, the next step is to judge the results and one way to do this is to compare them with those of professional wealth managers.

Two weeks ago, FTMoney (published by the Financial Times with its weekend editions) revealed the outcome of a specially commissioned survey of more than 40 wealth managers.  The figures for three quarters of them had been independently verified.  Investment returns for one, three and five years were shown, for an average balanced portfolio and an average growth portfolio. 

In both types of portfolio, the largest asset category is equities, but more so (as might be expected) in the growth portfolios, where the average is 66.3 per cent of assets but the maximum is 86 per cent.   Corporate bonds are the second largest element here, with an average of 10.4 per cent, but none of the other categories is significant.  In the balanced portfolios, bonds are a more significant element, with an average of 17.1 per cent corporate and 10.0 per cent government, reducing equities to 50.3 per cent.

How good are wealth managers?

It is evident from text accompanying the figures that ‘equities’ in this context include funds, including some limited (but growing) use of passive funds – ETFs and index-trackers.  The published figures do not reveal the extent to which wealth managers rely upon funds, rather than invest clients’ money directly in company shares, but the extra costs involved in using funds may explain some of the differences in performance.  As an exercise, I have aggregated the one, three and five year scores for all verified results shown for growth portfolios, to find the top four and the bottom four.  The former group’s performance aggregated in this somewhat artificial way is virtually fifty per cent better than the latter group’s, which in money terms will be a substantial difference.

For those who may be interested, the top group (with the five year performance in brackets) comprises McInroy & Wood (62.4%), St James’ Place (69.7%), Greystone (62.15%) and Standard Life Wealth (61.67%).  The bottom group comprises Stonehage Fleming (32.25%), Redmayne-Bentley (47.4%), Brooks MacDonald Asset Management (46.5%) and Credit Suisse (48.56%).   The performance figures are all stated to be net of fees.

The information obtained and published by the Financial Times is obviously of great value to those who, for preference or necessity, place their wealth with professional managers.  Those of us who choose instead to manage our own wealth should also be grateful to FTMoney, because the information it has provided enables us to judge our own performance and either take satisfaction from it or resolve to do better.  To do this, I begin by converting the five-year figures for wealth managers’ performance to the equivalent, cumulative, annual performance figures.

Judging what we see

Look first at the worst performance.  To produce less than six per cent per annum over a five year period is little better than an annuity rate, but an annuity includes a return of capital as well as a return on the capital.  Worse still for those trying to build their capital rather than live on it, around forty per cent of the returns shown here has been lost to inflation: the cumulative effect of RPI over the last five years is 11.9 per cent, an average of roughly 2.3 per cent per annum.

Turning to wealth managers’ average performance shown above, many private investors might be happy to achieve this.  It’s certainly better than an annuity and it easily beats inflation, but there’s still a wide difference from the best performance.  Net of inflation, the average performance is twice as good as the worst, but the best performance is almost three times as good as the worst.  Clearly, one’s choice of wealth manager can make, over time, a huge difference to one’s wealth,

Any private investor, with a modicum of knowledge and a suitable degree of care, ought to be able to do as well as wealth managers’ average performance.  There will of course be fluctuations, sometimes quite severe, caused by stockmarket movements as a whole as well as the variable performance of individual shares.   Nevertheless, for those who invest directly in equities, a five-year average annual cumulative return of 9.1 per cent should not be seen as exceptional.

Portfolio management

In my experience, many private investors are not truly aware of their own performance, but this carelessness can lead to performance which is less than desirable.  Portfolios need to be managed in order to achieve good performance and good management requires measurement.  With good management, it is perfectly possible to achieve performances equal to or even better than the best net performance achieved by wealth managers.

Personally, I prefer to keep my key records on paper, which helps me focus on what is happening in my portfolios more than I think I would by looking at figures on screen.  It also means I have a fixed record and not one which is being changed by a computer program, but however it is done the record should be fixed at the start and end of each year, or shorter period if desired.  Dividends can easily be aggregated, but share price performance needs to be calculated and recorded.  Cash must be included to complete the picture, adding back cash taken out during the period and deducting what has been put in.

It should be satisfying to measure one’s performance in this way.  If it’s less than satisfactory, the cause can be found and changes made.  If it looks wonderful, it should be possible to determine whether this was a product of good management, or simply good luck! 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.