This article confirms something that those of us involved in looking after client money have known for quite a while, namely that most active fund managers, despite charging extra for the pleasure, are incapable of beating the markets. This underpins our evidence based investment philosophy. To cut a long story short, the evidence from years of academic research, in many cases by Nobel Laureates, firmly suggests that the factor which has the greatest eventual impact on the returns (strictly variability and therefore expected returns, to those of you who are investment boffins) of a portfolio is the high level asset allocation, i.e. the split between equities and bonds. Strategies such as market timing (when should I buy or sell or should I hang on a little longer for the turn?) and stock selection (should I buy Tescos or M&S?) have been shown to have very little impact. Since these are the main methods supposedly used by active fund managers to add value, it comes as no real surprise that most of them fail. I say ‘supposedly’ because many simply track the markets and charge extra for doing so!
So, if you are looking for a portfolio that collects as much as possible of the market rate of return, according to the level or risk that you wish to take, start with the high level split. Then choose low cost funds and perhaps tilt towards sectors that have demonstrated an ability to provide extra returns given a certain amount of extra risk. Above all, avoid succumbing to the perfidious temptations of the financial porn which is regularly pushed out by the active fund management industry. They are thinking about themselves, not you.