Can you really beat the market?

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Managing funds is like a never-ending competition

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Question: I have read that funds do not normally beat the index and that the best thing to do is invest in an index fund. What is your opinion on the matter?—posted on PFA’s “ask a friend, ask Efren” service at www.personalfinance.ph

Answer: You may have heard of Jesse Owens, one of the greatest track and field athletes of all time.

At the Big Ten Championships in Ann Arbor, Michigan in 1935, Jesse set three world records and tied for a fourth in just 45 minutes. But Jesse is more known for the four gold medals he won in the Berlin Olympics in 1936 at a time when Adolf Hitler was using the games to promote the concept of Aryan racial supremacy.

Jesse was the first American track and field athlete to win four gold medals in a single Olympiad.

Managing funds is like a never-ending competition. A fund’s performance is always pitted against that of its peers as well as of a benchmark index.

A well-known Filipino fund manager and good friend who managed billions of pesos in assets once said that the rules of fund management are simple but difficult to implement. One reason for this is that fund managers’ performance is measured against moving targets. What makes it all the more difficult is that with all of their operating expenses, funds are hard put to outperform their benchmark indices.

But if we look at the historical performance of say equity funds, there is evidence to show that some funds do outperform the market.
For the five-year period ending Dec. 31, 2013, the PSE composite index or PSEi registered a compounded annual growth rate of 26 percent.

Data from both www.pifa.com.ph and www.uitf.com.ph show that there were mutual funds and unit investment trust funds that outperformed the PSEi over the same period by a wide enough margin to offset the cost of entry fees for the funds and dividends for the PSEi component stocks. Why, some index funds even outperformed the index.

So, in answer to your question, the market (as represented here by the PSEi) can be beaten. But here are my questions for you,

“Why do you need to beat the market? Will beating the return of the index really help you achieve your goal? Are you up to the risks that come with actively managing your portfolio?”

Thinking in relative terms is an intrinsic part of human nature. But if you really feel the urge to compare investment returns, instead of trying to beat the market, why not try beating your target.

Time and again, I have come across clients who wanted to invest in equities. But after I helped them quantify their goals and risk preference, they realized that they were better off investing in more conservative investment instruments. This lower return requirement is common because of one or a combination of the following factors: high savings rate, which in turn may be due to high income or a frugal lifestyle, modest goals, and neutral or conservative risk profile.

By trying to beat your target, you are really going after absolute and not relative performance, which is something that people need more of now in a world where the new normal is volatility.

So the better strategy is to just invest in that fund that can perform close to your own return and risk targets.

If you want more free investing tips, please visit www.personalfinance.ph. And if you want to learn how to compute what you need to earn and make choosing the investment vehicle a lot easier, attend our training entitled “Apply the Power of MS Excel to Personal Finance” on June 21, 2014.

moneymattersEfren Ll. Cruz is a Registered Financial Planner of RFP Philippines. He is best selling book author of Pwede Na! (A Complete Guide to Personal Finance) in 2004, and is the chairman and president of the Personal Finance Advisers Philippines Corporation.
Source: http://business.inquirer.net/173060/can-you-really-beat-the-market

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