Grant Pearson

Whether the Democrat’s Kamala Harris (from the blue team) or the Republican’s Donald Trump (from the red team) becomes the next President of the United States, will likely have little or no impact on longer term investment returns, according to Insync Funds Management (Insync).

‘As it draws closer to the big day, media and financial commentators will go into overdrive tempting investors to pre-position their investments for a red or a blue team win,’ said Insync’s Head of Strategy and Distribution, Grant Pearson. ‘Politicians themselves will likely use fear and temptation to try to influence perceptions of how their actions, or those of their nemesis, might impact investment markets.’

But the evidence, as captured below, suggests investment returns will be similar when looking beyond immediate market reactions, regardless of the outcome of the election.

‘If we look at every US election result since President Roosevelt, and how markets actually behaved across each term, we can see that who wins and who loses the presidential race makes little difference to returns at all,’ Mr Pearson said.

Across the last 35 presidencies, Republicans presided over the most negative and most damaging investment return periods. They had 4 negative return rates, compared to 2 for the Democrats.

‘These six presidential terms, however, total a mere 17% of all government terms since before World War II,’ Mr Pearson said.

Positive terms amounted to about the same in number and magnitude, no matter which party won, and so too were the worst falls.

Insync’s Chief Investment Officer, Monik Kotecha, said there are times where a particular sector of the market may be favoured, or not, by a certain presidency.

‘We last witnessed that with Trump in 2016.  Aspects of the healthcare industry, for example, were negatively impacted for a short time by Trump’s unsuccessful attempt to repeal the Affordable Care Act,’ Mr Kotecha said. ‘While overall, politics don’t dictate broad market outcomes, the 2024 election does present the widest range of policy and investment outcomes I’ve seen in my 33 years of market observation.’

Mr Kotecha said this election will likely have more pronounced effects at specific industry and stock levels.

‘This is due to stark differences between the parties on key issues such as trade policy and its influence on the pace of de-globalization, energy policy impacting the oil and gas and renewables sector, and regulatory approaches across industries from financial services to technology.’

The key takeaway for investors, however, is that while US elections can create short-term volatility and impact specific sectors or stocks in election years, they rarely change the long-term trajectory of the overall market.

Mr Pearson said, ‘Traders beware. As for investors, they are best advised to focus on business fundamentals, have exposure across multiple sectors, and maintain a long-term view rather than letting election outcomes drive their investment decisions.’

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Grant Pearson

A White Paper (the Paper) published by Insync Funds Management (Insync) says the industry has taken at face value the argument that passive outperforms active, but a deeper dive indicates this is not necessarily so.

Insync’s Head of Strategy and Distribution, Grant Pearson, author of the Paper, points to 7 key factors in portfolio construction that demand full consideration before assuming the powerful marketing messages from index managers are relevant or correct.

1. Blending 2-3 active funds often does better than an index fund

If devised properly by trained professionals, 2-3 active funds blended often do better than an index fund. Most investors using active managed funds tend to use a composite of them with various weightings that also shift over time. Intermediated inputs of some form are present in a very large portion of all active funds under management (FUM), be it model portfolios or forms of advised recommendations.

‘This is a valuable layer of skill that impacts the reality for end investors,’ Mr Pearson said. ‘Excluding this fact infers that such inputs and professionals offer zero value to the outcome. However, the evidence suggests they do add value.’

2. Applying meaningful time-based measurements

‘Rolling Returns’ instead of commonly used ‘point-to-point’ returns provide investors with far more useful assessments of historical returns, as they better account for the average result across all start/end months of the year, thus aligning an investor’s likely return experience.

‘Index promoters and researchers have avoided using this superior measure of returns,’ Mr Pearson said.

3. Challenging the over-simplification of index comparisons

Using almost any month of ‘point-to-point’ returns, a cohort of 10-20% of active funds usually outperforms the relevant index fund. ‘This is especially so outside extreme frothy markets,’ Mr Pearson said.

4. Measure active returns, risk adjusted and in the hip-pocket

Active management is only accurately calculated at the investor’s dollar account level, not at the fund level because risk and volatility management are provided with active management, and this alters the $-based account balance.

‘Two funds can post the same return ‘point-to-point’ yet have very different account balances simply due to the volatility in each. How often, how far and for how long a fund drawdown is, impacts account balances,’ Mr Pearson said.

For retirees siphoning off income and capital this is essential knowledge. It’s all in the dollar-based arithmetic, but this can’t be captured at the fund level where marketing is focused. Index funds have no risk or volatility management. Thus, along with the all-important hip-pocket is the cost/benefit of risk management in active investments. Both are crucial considerations.’

5. Index comparisons rarely exclude companies with poor stewardship

Most active funds including non-ESG offers do have standards on this to various degrees.

‘If you care about good stewardship and basic common values, then this needs to be accounted for in comparisons,’ Mr Pearson said. ‘Investors do care by and large, but that doesn’t mean they necessarily want ESG focused funds. Governance matters but indexing is devoid of this.’

6. Poor index benchmark selection

Whole sectors of an index’s return are often pitted against a manager whose fund deliberately doesn’t invest in most of it (e.g. emerging markets and resources). An active mega cap global equity manager is often compared to an entire index (usually the MSCI-AWI) that’s mostly comprised of non-large cap stocks and also in countries they wouldn’t ever invest in. ‘One has to ask if this is even appropriate?’

7. The downsides of ‘dominated concentration’

The risk of concentrated investments, particularly in specific sectors or narrow asset classes, may not be adequately addressed by passive strategies. When a few large-cap stocks dominate an index, the overall index performance becomes highly sensitive to the performance of those stocks. If one or more of these stocks experience significant price declines, the entire index’s performance can be adversely affected.

‘Diversification is key in managing risk,’ Mr Pearson said. ‘Concentrated indices lack the benefits of diversification, which can help cushion the impact of poor performance from a few individual stocks. Diversified portfolios tend to exhibit lower volatility and more consistent returns.’

Mr Pearson said the Paper uncovers some of the dangers of assuming passive funds deliver better than active approaches, which include that it may rob investors of a better hip pocket result, that it doesn’t properly manage risks and that it undervalues and undermines the worth of professional skill and research.

‘Passive investment has a place but to nowhere near the extent it is currently being used in our industry, which is relying upon incorrect assumptions and omissions. We owe it to the end investor to look harder.’

Read the White Paper.

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Grant Pearson

A new app, ‘Threads’ built by Instagram, which enables the sharing of text updates and joining public conversations, recently reached 100 million users within an astonishing five days.

‘This is a powerful demonstration of the lightning speed at which innovation is accelerating,’ says Insync Funds Management (Insync)’s Head of Strategy and Distribution, Grant Pearson. ‘Make no mistake, the frantic pace of change now spells danger for investors.’

For context, Facebook took 4.5 years to reach 100 million users, Instagram took 2.5 years, TikTok achieved it in nine months, and Chat GPT took two months.

‘The reason this means big trouble for investors is that they could be in the right company today and, as little as weeks later, be in the wrong company,’ Mr Pearson says.

The pace of innovation does not just affect pure technology plays.

‘All companies could be affected as they all rely on technology of some sort,’ he says. ‘If their competition embraces new technology better and faster, a dominant company today may find its revenues and profits under immediate threat. And let’s not forget brand new competitors for firms that technology has opened the gates to.’

Mr Pearson says that while in the past investors had months or even years to discover an emerging technological breakthrough, assess it, seek views, and then act; now they have next to no time and the skills required to do it are often outside the investment industry.

‘In fact, the average life span of successful businesses is being compressed into less than 10 years duration,’ he went on to say. ‘This is disruption accelerating at the same time that timeframes are compressing.’

Annual increases in computing processing power are now many hundreds of times faster than previous computers which are themselves under five years old.

‘Look out further, say six years, and it’s even more profound,’ he says. ‘Google’s latest Sycamore Quantum Computer, testing now with operational status by 2029, is an astonishing 241 million times more powerful than today’s fastest supercomputers!’

In other words, Sycamore can solve in seconds a problem that takes today’s fastest supercomputer 47 years.

‘This first iteration of Sycamore is only the ‘Model T’ of what is to come,’ Mr Pearson says. ‘The alarming thing for the investment community is that we are only at the very beginning of this acceleration. It is akin to sitting in a rollercoaster as it has just tipped into its near vertical first run.’

Couple this extraordinary increase in power with the advances in AI and Mr Pearson says gargantuan change is afoot, change that will revolutionise our world and turn most industries upside down, along with investor returns.

‘Fund managers and researchers need to quickly create robust means to assess and counter the acceleration of technological change and shrinking timeframes, to reduce the threats to returns, as well as better understand which companies will deliver the decent performances of tomorrow,’ he says.

‘Our industry has a reputation for being slow to change, with egos routinely getting in the way of adapting. Investors need to check carefully that their fund managers are very clear as to how these factors impact their investment processes if they are not to be blindsided and saddled with disappointing returns.’

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Grant Pearson

The financial services industry is hooked on using ‘Point-to-Point’ returns to measure fund performance, despite the fact that they often mislead advisers and their clients, according to Insync Funds Management (Insync).

‘Point-to-Point returns are the wrong measure for fund performance, and yet they’re endemic,’ says Insync Strategy Head, Grant Pearson. ‘They undeservedly grab pole position across platform and media reporting, researcher tables and software, and even on websites and slide decks.’

Point-to-Point returns measure performance from a specific set date point, for a specific duration, for example, 1,3, 5,7 or even 10 years.

‘The trouble with Point-to-Point returns is that they are only valid if an investor is investing on a specific month for the exact specified duration. Point-to-Point returns mislead advisers and clients because they infer these returns are typical, when often they are not.’

Mr Pearson says it is common practice to then review results ending in calendar or financial years.

‘While this sounds right, these singular dates are not necessarily any more or less relevant than any other start/end month. Few investors buy funds on New Year’s Eve or on 1 July, and sell exactly 1,3,5, 7, or 10 years later.’

By way of example, he says an investment might drop by double digits in January, do reasonably well for the next 10 months, and have a lacklustre return for December.

‘The Point-to-Point result might thus infer the investment ‘performed poorly’. But if the Point-to-Point period started 1 February, and ended the following 31 January, it could have told a much better story,’ he says.

‘The truth is it may or may not be a good investment, but you can’t know unless you examine each single one-year period starting every month over a sufficiently comparable time period.’

Mr Pearson says Point-to-Point returns are dangerous used in isolation, or as the primary return measure, no matter the time frame. Using them for new funds that have only a few years under their belt are perhaps an exception.

‘We firmly believe Point-to-Point returns should only ever be used in ‘behind-the-scenes’ ways such as simple cross checking for extreme under/over performance, to check fund behaviour at certain points in the cycle or during a specific event – and then, only for shorter-term time frames and rarely for unsophisticated investors.’

According to Insync, the better way to measure returns is to examine them via ‘Rolling Returns’. This method calculates performance based on all months, not just January or July.

‘They more fully account for the fact that investors typically do not invest only in January or July but instead are investing and redeeming across all months. You can then calculate the average rolling returns over the time period in question.’

While not perfect, Rolling Returns offer a far more robust and more complete return assessment for advisers and their clients.

‘They are a more effective measure because they provide a more holistic picture of an investment’s returns,’ he says.

Crucially, the Rolling Return method allows an investor to evaluate the consistency of a fund’s performance over time, including the impact of ups and downs of events and market cycles, which is a more revealing test of a manager’s skill.

It also removes any possible ‘skewing’ of a measurement result. ‘Rolling returns provide a particularly robust analytical tool for evaluating managers during volatile periods. With rolling returns, you can’t simply shift the performance date range to paint a rosier picture,’ he says.

It’s also important to match the rolling period used to the time period the manager and asset class is focused upon. For Bonds it may be better to focus more upon 2 and 3 year rolling periods, for equities 5 and 7 years.

‘We also find it surprising and frustrating that the industry appears to pay scant attention to the written aims of each fund and how much trading they do, as this influences the buy/sell/hold calls managers make,’ Mr Pearson says.

Point-to Point measures often misrepresent the result. ‘Two managers can hold the same stock but with differing time frames in mind. This fact is lost in most analysis,’ he says. ‘Our industry owes it to advisers and their clients to get it right, so that they can make informed and appropriate investment decisions using better measurements.’

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