Many family offices allocate the equity share of their wealth to different investable products managed by professional managers. Are those products delivering the expected value? Here are the comments we hear from our customers: “The performance of many funds and products we purchased is way behind.“ – (FO in Zurich). “If we sum the performance gap and the charged fees we are very unhappy. Where is the value?“ – (FO in Monte Carlo). “Even other more complex products did not deliver. We want to streamline the allocation.” – (FO in Geneva). “We are losing confidence on several third party products, even from brand names.” – (FO in London). “We decided to use the best technology and raise our internal capabilities.“ – (FO in Singapore).
Let’s see the facts: Mutual funds – The industry of actively managed products consistently fails to deliver the value that investors want and deserve. Over the last 20 years: 93% of funds underperformed the benchmark S&P Composite 1500. 94% of large-cap funds underperformed the benchmark S&P 500. 94% of small-cap funds underperformed the benchmark S&P SmallCap 600. 95% of mid-cap funds underperformed the benchmark S&P Midcap 400. 94% of multi-cap funds underperformed the benchmark S&P Composite 1500. Similar results were found for growth and value funds of various capitalization categories. (Source: Alpha Architect). In theory, active funds, with their meticulous stock selection, should outperform their benchmarks. However, in reality, they often fall short, consistently underperforming the market indexes. (Source: SPIVA Scorecard Report). Hedge funds- Over each of the one, 10-and-20-year periods, hedge funds underperformed every single major equity asset class. Over the last one-and 20-year periods, they even underperformed virtually riskless one-year Treasury notes and outperformed them by just 0.2 percentage points over the last 10 years.(Source: Evidence Investor).In 2024, the HFR Global Hedge Fund index capped the first half with a meager 2.89% gain. (Source: Reuters).
Why many sophisticated, “super expert” professional managers fail to beat the stock indices with remarkable consistency over the years? At Trendrating, we think we have the answer. Too many managers have an investment strategy rooted to a highly discretionary approach. Discretionary investing may be hostage of several flaws, such as: Untested assumptions, Biases, Emotions and forecasting traps. Markets today are extremely complex. Price trends are driven by several factors where conventional, old-school financial analysis is outweighed by computer-driven trading, social media influence, the momentum investors impact and a faster-moving money flow from sovereign funds. The way to deliver superior performance is using an investment process based on well-tested, clearly defined quality rules and a systematic process, that guarantees discipline and consistency. The opportunity to outperform is called performance dispersion. The dispersion is a repetitive fact in any market cycle. This table offers an idea of the dispersion phenomenon. This is the dispersion in the S&P 500 universe in 2022 and 2023. (Source: Trendrating).
The ability to discriminate between winners and losers can make the difference. Investors who can maximize the portfolio exposure to stocks in the top 25% while limiting the positions across the bottom 25% can easily outperform the relevant benchmark. Here is a comparative analysis of a few premier ETFs vs. a systematic investment strategy that: 1) Selects the stocks using well-tested, objective rules to spot the outperforming stocks and avoid the losers. 2) Executes the strategy in a systematic way, with no human interpretation or second-guessing. This is the key. (Data below as of June 28, 2024. Source: Trendrating)
A systematic strategy, selecting stocks that combine good fundamentals and validated positive trends can exploit the performance dispersion and outperform other products, either active or passive. It is now easy for family offices to diversify their equity exposure using systematic methodologies that can offer several benefits vs. the conventional products they own, such as: 1) Increased returns, 2) Better risk control, 3) A more logical and objective process, 4) Transparency of strategy and holdings, 5) Saving of fees. Trendrating enables family offices to profit from a systematic process the way they prefer: 1) Using our technology to build, test and optimize custom-made strategies. 2) Accessing the rich set of analytics and insights that provide valuable information to design effective strategies. 3) Replicating any of the model portfolios available in the directory. Contact us at discover@trendrating.net to learn more.
Source: The Family Office Magazine