There are many questions to ask and a lot of research to do before you find a money manager you’re comfortable with, including understanding their performance, costs and level of service. This can be a challenging task, especially so since many investors value different qualities in a money manager. Some investors focus on client service and others on reputation or fees. Some investors pay particular attention to past performance to try to assess the likelihood of future success. However, past performance does not guarantee future results and it’s even less telling when that performance isn’t evaluated correctly.
We occasionally get questions from prospective clients about an early 2016 article written by CXO Advisory Group, a third-party that writes editorials on investing topics. In the article titled “Forbes Evaluates Ken Fisher’s Stock Picking,” CXO attempts to evaluate the performance of Ken’s stock-picks published in his Forbes columns.While we respect CXO’s efforts and have no doubt they were well-intentioned, we disagree with their conclusions. What’s more, we believe some of the conclusions run counter to CXO’s own findings. Here, we’ll address the problems with CXO’s findings and provide some helpful tips on how to properly assess portfolio performance.
In the article, CXO evaluated the performance of a subset of Ken Fisher’s stock picks published in his “Portfolio Strategy” Forbes column, which ran from 1984 – 2016. The article used Forbes’ methodology of assessing the performance of Ken’s stock picks over a 12-month period, placing each year’s picks into an equal-weighted portfolio measured against the S&P 500 Index. The merit of such a methodology in evaluating portfolio performance is questionable on its face, and we outline its specific limitations below. Further, we do not believe this analysis is useful for evaluating Fisher Investments’ performance.
In his Forbes columns, Ken wrote for an audience of mostly self-directed investors looking for timely stock tips they could incorporate into their own, active investing process. Fisher Investments’ client portfolios generally did not hold the securities referenced in Ken’s Forbes columns.
Fisher Investments’ investment methodology focuses on building well-diversified portfolios personalized and aligned to each client’s unique investing goals. Client portfolios are built using our time-tested, top down investment process, which is led by the firm’s five-member Investment Policy Committee and supported by a large Research staff. These diversified portfolios can feature dozens of securities and incorporate many different investment themes. These securities, themes and portfolios also change over time based on Ken and the Investment Policy Committee’s forward-looking market views.
In their analysis, Forbes compares columnist stock picks against the return of the all-US S&P 500 Index. While the S&P 500 can be a good proxy to understand US stocks’ general direction, doing a performance analysis relative to the S&P 500 alone can be misleading (compared to a global index like the MSCI World). In his Forbes columns, Ken (and many other columnists) often wrote about non-US stocks alongside US picks. An inappropriate comparison like this could under (or even over) represent the performance of his picks. For example, in a year where one of Ken’s picks increased 15%, but US stocks broadly increased 10%, Ken’s picks would look very good. However, if most of those picks were Non-US stocks, and Non-US stocks broadly increased 25%, then Ken’s picks would have actually performed poorly when compared apples-to-apples. This is a hypothetical example, but it demonstrates how using inappropriate comparison measures can be misleading.
Forbes’ comparison only measures how stocks performed in the calendar year that the picks were published. This timeframe is arbitrary, relatively short, and individual stocks may have fared differently over other (albeit likewise arbitrary) timeframes—e.g. three months, two years, five years etc. Most investors have much more than one year to plan for and such arbitrary time periods likely don't tell you much about long-term performance. Additionally, there is nothing special about the calendar year—cycles, context and circumstances often matter more.
CXO’s report only analyzes Ken’s picks from 1998 to 2015, but Ken wrote the column from 1984 to the end of 2016. So while the article does measure 17 years of his columns, it neglects nearly the entire first half of Ken’s tenure with Forbes! We have no idea why CXO (and Forbes) looked only at the period they did, however a thorough analysis might have looked at his entire tenure.
All this said, Ken is highly regarded and recognized in our industry. Ironically, CXO is one of those organizations who have recognized Ken’s stock-picking prowess in the past, ranking him #2 out of 68 industry professionals on its “Guru Grades” list in 2013 for market forecasting accuracy. In this study, they compared Ken’s stock picks against those of 67 other “gurus” in the industry from 2005 to 2012.
CXO’s evaluation of Ken’s stock picks is not representative of Fisher Investments’ performance. But what if you wanted to explore Fisher Investments’ or any other money manager’s performance? Investors and the media often attempt to evaluate money manager performance, but many do so inaccurately. When doing these calculations, here are some important tips for better gauging their performance:
If you want to look at a manager’s performance, it’s better to request the manager provide the long-term performance of their portfolio strategy. Make sure you are comparing an investment company’s performance against an appropriate benchmark. Often, money managers will publicize the benchmark they are using for each strategy. However, if you need to find this comparison point yourself, make sure you’re using an appropriate measuring stick. Optimal benchmarking requires comparing against a broad index resembling a portfolio’s overall strategy, asset allocation and composition. Comparing a manager’s performance to an unrelated index can lead to ill-advised moves and inaccurate conclusions that can hamper your long-term returns.
If you’re a long-term investor, don't assume a single year’s performance is all telling. Most investors have much more than one year to plan for and short time periods likely don't tell you much about a money manager’s abilities. It’s better to judge a money manager’s performance against an appropriate benchmark over a reasonably long period of time (such as a full market cycle) relative to your unique investment time horizon.
Most money managers or investment advisers charge a fee for their services and clients normally incur trading, mutual fund and other fees as well. To understand a money manager’s performance, you should account for all fees and costs.
Index performance measures often vary. For example, one important distinction is “price return” versus “total return.” Price return only accounts for how much stock prices have changed over a period. Total return takes into stock price changes and the impactofdividends and interest accrued over time. Investors should be most concerned with total return since it is more representative of the return an actual portfolio would generate.
When judging the performance of a financial adviser handling your savings, you’ll need to account for cash flows. Many investors make the mistake of simply comparing ending portfolio value relative to beginning value or some arbitrary high water mark. These comparisons are an inaccurate gauge of portfolio performance if you incurred cash flows—took withdrawals, made deposits, etc. Instead, you must use geometrically linked, time-weighted return, which is basically a return calculation that removes the impact of contributions and withdrawals. Your money manager should be able to run these calculations for you to show what their actual performance is.
It may feel good if your money manager wildly outperforms a market benchmark one year, but it could also mean your money manager is taking on excess risk. One common tool for measuring risk-adjusted returns is the Sharpe ratio—the average return of an investment minus the risk free rate divided by the investment’s standard deviation. If your portfolio’s Sharpe ratio is wildly higher than that of your benchmark, your money manager could be taking on excess risk.
Finally, remember that while these performance evaluation tips should help you generate more accurate comparisons, fund or portfolio performance is just one part of a money manager’s service. We believe there are more important factors to consider when choosing a money manager.
You deserve an adviser you can trust and feel comfortable with, and since we first began providing investment management services in 1979, our goal has been to put clients first. We believe this focus on putting investors, like you, first is why we’ve successfully managed portfolios for 39 years and currently serve over 69,000 private clients globallyi. As a client, you can expect the following from us:
Personalized Portfolio Management
Proactive, World-Class Service
Expertise and Experience
If you are interested in learning more about Fisher Investments’ services, fees, or performance, please call and speak with one of our qualified representatives today at 888-823-9566.
iAs of 12/31/2019. Includes Fisher Investments and its subsidiaries.
iiAs of 12/31/2019. Includes Fisher Investments and its subsidiaries.