Commentary: The Survivors
The above image tracks the bullet holes on Allied planes that encountered Nazi anti-aircraft fire in World War II.
When the Allied military brass saw this picture, they took the decision to reinforce all those areas most often hit by anti-aircraft fire. After all, this is where the ground crews noted the most damage on the returning planes. However, prior to them starting work on the reinforcement of these areas, a mathematician named Abraham Wald pointed out that the red dots were actually the damage on the planes that made it home.
He noted that the Allies should rather place more armour on the areas where there were no bullet holes at all, because those are the places where planes got hit that didn’t make it back.
Survivorship bias is the logical error where a person only focusses on survivors, overlooking the non-survivors. This can lead to incorrect conclusions being made.
Currently, many funds are delivering good performance by simply having large exposures to the U.S equity market, and specifically to ‘growth’ type companies (Amazon, Facebook, Google, Netflix etc.). The conclusion being made is that most funds that have large exposures to ‘growth’ type companies in the U.S, regardless of the valuation of those companies, are skilfully managed, as supported by the short-term outperformance of these funds.
The fact is that many funds have followed a similar large regional or sectoral exposure in the past, regardless of valuation, which worked in the short-term, but ultimately resulted in their demise. It is only when one considers longer performance measurement periods that manager skill becomes increasingly apparent.
Below is the performance ranking of the Fintax Funds relative to their peers as at the end of 2019. It is clear from the number of peers in the table that many have not survived, primarily by following short-term risky strategies. Clearly, MGIM who manages the Fintax Funds, have done well to deliver performance that ranks both funds in the first quartile relative to their peer groups over longer performance measurement periods:
|1 month||3 months||6 months||1 year||3 years||5 years|
|Fintax International Balanced Peer Rank||5/200||4/199||6/194||15/188||26/151||18/121|
|Fintax International Growth Peer Rank||7/85||5/85||6/82||10/80||17/71||15/59|
By taking long-term sustainable investment actions, the Fintax Funds have not only survived, they have also protected and successfully grown investor capital, on a long-term risk-adjusted basis.
As always, we welcome any questions, comments or queries you may have.