#301: Can we pick winning funds?

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Simon Shares

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Can you pick a winning fund?

The latest SPIVA for SA is out and it is bleak reading for active managers in South Africa. Around 75% are beaten by the benchmark over one, three and five years.

• Benchmark is Domestic Shareholder Weighted (DSW) capped or normal.

This means you have a 1 in 4 chance of picking an out preforming fund - very bleak odds.

So here's the question, and it is a real question. How does one pick the winning manager going forward? There most definitely will be those who out preform, some even consistently, but how do we spot them in advance? They themselves will tell you that past performance is no guarantee of future performance, and this is 100% true for a bunch of reasons.

• Changes in personal. A winning manager leaves, is the replacement as good?
• They had a few lucky calls or managed to avoid some disaster that beset the market. Skill or luck?
• As they get larger it becomes harder as your investable universe shrinks.
• I remember a Morningstar report from a few years ago looking at the US market that said the only reliable predictor of future returns was fees. The lower the fee the more likely the fund will out preform. This makes sense, but it is still not a full proof method.

I also know a number of people who chart unit trusts with fairly good success. Either just normal technical analysis or relative performance. Of course tax is an issue here.

If you have a method for picking winning funds let us know.

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