Veritas – Longer memories required as funds lose credit crisis from long-term performance

If you ask almost any equity fund manager what they were doing exactly three years ago today, the answer will probably be: ‘I was hoping’.


Hoping that the turnaround in share markets, which happened three years ago this week (on 9 March 2009, to be exact) was sustainable.

Hoping that the colossal fall in global markets, to an index value of 688.6 from a peak of 1561 in May 2008, would end.

And hoping that the recent inflexion point in markets would also be the end of the sharpest crisis industrialised economies had suffered since the 1930s Depression.

The Wall Street Journal marked the bottom that day, but only by asking in a headline, “How low can stocks go?”

America’s Dow Jones All Industrials index was on its fourth consecutive falling week, the S&P 500 had dropped below 700 for the first time in 13 years, and one of the US investment bank that was left standing was warning the S&P 500 could dive further, to 400.

But the answers to fund managers’ hopes were largely positive.

Yes, the equity turnaround did indeed have legs, at least until April 2010 when the outcome of the 2008/2009 liquidity crisis became a sovereign debt crisis in the eurozone.

The MSCI World index’s fall of early 2009 did indeed end, and it added an eye-watering 80% over the following 13 months, though it has added only 48 more points amid considerable volatility since then.

But no, it was far from the end of the sharpest crisis in developed economies and markets since the 1930s. Peripheral eurozone countries soon added to equity fund managers’ woes.

That last fact will not, however, stop celebrations by equity managers who this week see that first week of March – the very tail end of Credit Crisis Part I – disappear from their funds’ three-year performance numbers.

Therefore their funds have now also, in one sense, also ‘turned a corner’.

But three main points seem to be pertinent for fund selectors.

First, have a long memory. Five year figures, or even longer, are more likely to include more of a business- and market cycle, and show how a manager performed in difficult markets (if that same manager is still employed).

Second, have qualitative input to fund analysis. The last quarter of 2009 included not only sharp falls in fund values, but also poor governance activities such as gating and suspensions for hedge funds, deterioration of investment process at some mutual funds, and ‘breaking the buck’ by some inadequately invested money market portfolios, which investors had assumed would keep values safely at or above par. Remember this.

And third, remember that such horrible conditions as 2008 / first quarter 2009 can and will appear again. Examine correlations of funds in bad times, too – when investors most need the ‘free lunch’ of diversification to work for them, but typically when it does not.

Allocators who only analyse funds over set time periods, and use arbitrary starting and ending points that suddenly exclude radically worse (or just ‘different’) market conditions, do not serve their clients well.

The allocators risk making assumptions about fund managers based on performance only measured over good times.

And if there is just one lesson everyone should learn from the credit crisis, which became a banking crisis, which became a sovereign debt crisis, which produced the first developed economy default in history, it is this: sooner or later, the good times end.


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