It is important to review pension fund investment performance on a regular basis to decide if any action is required. You may rely on your financial advisers to take on this task (if you have one) or you may take the DIY route. Spotting trends (positive or negative) can be a useful guide but there are dangers in reacting to short term movements in the market.
It is important to keep in mind:
- Investment is a long term game and requires patience and discipline.
- Knee-jerk reactions in response to a funds short term performance can be regretted in the longer term.
- Comparing short term performance of your fund with one held by friends, family or colleagues can be misleading.
To illustrate the point let’s compare the historical performance of two investment funds and two sector benchmarks. The popular Prudential Cautious Fund (often referred to as the Pru fund), TCF Investments Multi Asset Portfolio Solution 4 (MAPS) fund, the ABI Cautious sector and ABI All UK companies sector funds.
The Pru and MAPS 4 funds have very similar asset allocations with similar weightings to shares, bonds, property etc. There is, however, one major difference the Prudential Cautious fund performance is smoothed whereas MAPS 4 is not. Because of this “smoothing” The Prudential fund tends to show a steady increase over time with occasional sudden significant rises or falls. The MAPS (and others) funds values are calculated daily and show significant volatility (swings in value) when plotted over time.
In financial markets, any trend that shows as a straight line must be smoothed in some way. Straight lines (assuming they point up and not down) can be comforting but they rely on complex calculations. Those calculations may not be fully transparent. Someone has to perform the calculations and make appropriate corrections and that tends to come at a cost.
If we observed fund values between 9 July 2018 and 28th August 2018 and took a snapshot on the 28th the performance of the Prudential and both ABI funds were roughly the same as the MAPS4 fund performance approximately one per cent higher. MAPS4 Wins.
If we observed fund value between 9 July 2018 and 12 October 2018 and took a snapshot on the 12th the Prudential fund outperformed the MAPS4 and ABI cautious funds by two per cent and the ABI All UK companies fund by four per cent. Pru Wins.
If we compared fund performance over the longer term and took a snapshot of fund values between February 2016 and February 2017. In February 2017 the MAPS4 fund was roughly seven per cent higher than the Prudential cautious and ABI cautious fund and approximately five per cent higher than the ABI All UK companies. MAPS4 wins.
It is possible to take any selection of popular investment funds and find a similar pattern over time. On different dates, different funds will tend to come out on top. The above illustrates that short term trends are only indicators, what matters is the medium to longer term performance, typically 3 to 5 years.
If one fund is consistently performing worse than the rest over a number of years then that would be a concern. However, It is important to remember history is not necessarily a reliable indicator of the future.
A level of experience and skill is required to spot when it is time to take action and when it is best to leave things as they are. Knee-jerk reactions in response to a short term trend or (worse still) spot comparisons of pension fund performance may be regretted in the longer term.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. Tax regulations can change and any figures quoted above are at the date of publication.