Why an Advisor’s 10-Year Investment Track Record Is No Longer Valid

Updated: Jun 23, 2019

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It’s been ten years since the birth of the bull market our economy is witnessing. Since this period, millions of households have sold their stocks or pulled their money out of investments out of fear the recession wasn’t quite over. Fast forward to today, and the markets continue to set high-performance record numbers.

This continual growth over the decade is allowing advisors and firms to post some gorgeous returns on their investment track performance. If caught in the belief that your investments will also see double-digit growth, you may be naïve or lack a real understanding of what is going on.

Most investment and wealth management firms abide by the industry practice of displaying returns according to the Global Investment Performance Standards, also known as GIPS. I am a firm believer to trust GIPS performance track records rather than a firm’s performance that may be reflected in marketing materials.

According to the CFA Institute, “GIPS is a set of standardized industry-wide ethical principles that guide investment firms on how to calculate and present their investment results to prospective clients.”

GIPS requires firms to post historical performance records up to a minimum of ten years to include performance since the firm’s inception. Now imagine if a firm started its investment fund in June 2009. If it followed the Standard and Poor’s 500 Index, the returns would be handsome. You may also be tempted to invest with this firm because you’re seeing substantial growth year-after-year.

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One thing all investors learn quickly is that it is easier to make money in a bull market than it is in a bear market. It’s why the dot-com boom was producing so many millionaires. People were literally throwing their money at tech stocks and within months saw massive growth.

Before you put your money into an index or stock fund, look at the firm’s performance before 2009. Act like an investigator. You must understand how the firm manages its funds during the good and bad times of the stock market.

When the markets are shifting south, are the portfolio managers changing their strategy and why? Are they focusing on defensive stocks or dividend earning companies? Are they shifting their focus towards fixed income, bond investing, or global opportunities?

I recall a moment when I was working with an investment firm, and the managers were struggling to keep their equity returns above 0% for the quarter. This occurred immediately after the earthquake that struck Japan, and the fear of nuclear contamination was the priority on the island. A bond trader stood up, who had taken abuse for not having sexy returns over 3% because he invested in government bonds, yelled “2% anyone? Anyone…I have 2%.” Of course, he was being sarcastic, but it goes to show there are opportunities for growth.

For example, when examining the Franklin International Growth Fund (Advisor Growth Fund), the firm posts its Calendar Year Total Returns % as seen below:

In 2009, the fund saw growth of 58.63% with a few years experiencing some declines afterward. For many inexperienced investors, the fund may seem like a great place to put store away some cash, but there is a fundamental issue with the fund. It hasn’t been genuinely tested during any economic downturns.

While this doesn’t mean it is an inadequate fund, the fund has an inception date of 2008 and hasn’t experienced recessions or bear markets. However, It has enjoyed a good climb for its next ten years to date.

In my opinion, the real test of a significant fund is how well its managers and analysts ride out the economic storms. I prefer having funds that went through the 2000-2002 decline and the financial recession. A lot of firms knew the recession wasn’t going to last very long, which is why you’ll find many new start-up funds with an inception date ranging from 2008-2010.

Next, let us compare it to another Franklin fund, Franklin DynaTech Fund. The fund’s inception date is January 1, 1968. The fund has a very long track record and has ridden out many financial storms. While this fund isn’t a direct apple-to-apple comparison to the International Growth Fund, it does highlight the importance of a long and proven track record.

Source: Franklin Templeton

The next time you shop around for a new fund or looking to put your money to work, do some investigation work. Research when the fund was started, how often it rotates managers, and how well has the fund performed during recessions. By having a track record that extends beyond ten years to incorporate performance prior and during the 2007-2008 financial downturn, it will present itself on how well your fund may do for when the next bear market approaches.



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