Best performer? Not always

Michael Hutton

Recent market volatility is leading to many nervous investors changing investment managers in hopes of getting better performance without properly considering the consequences, according to a financial planning partner with HLBMannJuddSydney.

Senior partner with the firm, Michael Hutton, warned that in an excitable market investors need to be better informed when moving fund managers, and should not make the decision on performance tables alone.

“In the first place, changing investment managers now will crystallise any recent losses made so that investors are transferring a lesser amount to the new manager. In addition, they will also be crystallising any long-term capital gains and may be liable for CGT (capital gains tax), further reducing the amount of funds that will be invested with the new manager or fund,” Hutton said.

Hutton also said many investors misinterpret performance figures or simply chase the previous year’s best performing manager or the manager that researchers have highly rated over a set five or 10-year period.

“Sometimes these figures can be misleading, inasmuch as a manager can appear at the top of a five year chart because of an exceptional one year performance five years ago, which has not been repeated in the next four years of very ordinary performance,” he said.

However, Hutton added that this is not to say that investors should never move to a different investment manager, but must exercise caution when doing so and examine “what the full effect on their capital will be, rather than making an impulsive decision”.

“In any event, rather than choosing the best performing fund manager in any asset class, investors should take a diversified approach to help manage market volatility. This involves not only spreading investments between different asset classes, but also having different styles of manager within each class,” he said.

“In this way, they are likely to achieve a more consistent return regardless of what happens in the market.”