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1. Why have I not heard about using these Analytics from my Investment Manager? My actuary? My pension plan consultant?

Roughly 80% of Investment Managers / Funds under perform the Index, net of fees, over a 5-year period thus it is not in their best interest to share this data. 

To the best of my knowledge, no one else is providing this Analytics service; that makes it even more challenging for your Investment Committee to get the best, risk adjusted returns possible.

I think the SEC mandated Rule 156  ‘past performance is not indicative of future performance’ disclaimer has discouraged consultants / actuaries from providing this data to clients. It definitely puts your Investment Committee members at a disadvantage. 

2. What Just Analytics is saying is inconsistent with the Securities and Exchange Commission’s mandated ‘past performance is not indicative of future performance’? 

The SEC mandated the Rule 156 ‘past performance is not indicative…’ statement in response to unscrupulous Investment Managers that intentionally misrepresented their funds past performance (e.g., not reporting on all their sub funds, choosing the best possible time frames so as to not report the months where they really under performed the Index, etc. ) – see the SEC website for more details. 

It was a reasonable & responsible thing for SEC as the regulator to do. The SEC needed to look after the investors. Please remember that the SEC ‘past performance is not indicative of future performance’ statement is accurate for roughly 85% of Investment Funds. It is just not accurate for that 15% of Investment Funds that have a truly better methodology which gives them a competitive advantage & a higher, statistically significant likelihood of outperforming the Index over time. 

3. How do I know that your thresholds (90% over 3 years, 85% over 5 years, and 80% over 10 years) are valid? 

Scientists use a 95% threshold which is a very rigorous standard. 

‘Flipping a coin’ gives you a 50% likelihood. 

The 90% / 85% / 80 % threshold identifies the  top 5% or so of Investment  Funds that are most likely to outperform the Index over time. I want your fund to be successful so we intentionally set a very high standard. 

4. If we hire an Investment Fund with a statistically significant likelihood of outperforming, will they always beat the market? 

No, they will not beat the market every year; even the best funds under perform, on average, 4 years out of 10. As you know, the benefit is that these Investment Funds are much more likely to outperform the market over a 5- or 10-year time frame. 

5. Is it possible that their performance will deteriorate over time? 

Yes, it is possible. However, if their methodology remains sound, they should continue to outperform the Index.

6. What about ETFs? Should I be concerned? 

Possibly. Roughly 40% of ETFs are a true ‘track the index’ ETF – very low fees, a risk portfolio that is virtually identical to the market, and probably 5000 plus companies are represented in the fund. They will track the index and typically have very low fees of less than 20 basis points. 

However, ETFs have morphed over the past 10 – 15 years. There are funds with a significantly higher risk profile than the Index (think double), fees that are more in line with an active Investment  Fund (anywhere from 70 to 140 basis points) & very few holdings (50 or less companies). They are trying to outperform the market. You need to be aware whether your ETF is ‘track the index’ or ‘actively managed’ so you are making a conscious, informed asset allocation decision.

7. How often should we do this analysis of our Investment Funds? 

I would recommend an annual review, every two years at the very least. I realize this may appear to be self serving but the sooner you detect a potential problem, the sooner you improve your Fund’s return. 

Perhaps a good topic of discussion for one of your Investment Committee meetings?