Going with the flows

The mantra that past performance is no guarantee of future returns is yet to sink in with many investors. 

The mantra that past performance is no guarantee of future returns is yet to sink in with many investors. It’s a point not lost on the finance industry, which is hard at work ensuring it stays that way.

A case in point: In October 2009 the Australian dollar was buying 88 US cents. The Aussie peso had miraculously transformed into a safe-haven currency, bolstered by a China-driven mining boom, low government debt and a Houdini-like ability to escape recession. The currency was charging, eventually hitting a high of US$1.10 in August 2011.

If ever there was a time to diversify one’s portfolio overseas, this was it. High quality businesses were cheap in their local currency but buying them with Aussie dollars made them potentially more so.

Intelligent Investor set about the task with fervour, eventually publishing nine articles and three special reports on the merits of investing overseas, offering advice on attractive international managed funds and listed investment companies. We even picked a few bargain stocks in US and European markets.

Meanwhile, the rest of the industry was punting on the resources boom, then in full swing. Junior mining stocks were seeking backdoor listings and every fund manager wise to the marketing opportunity was launching a resources-specific fund. We were banging the international diversification drum in an all-but-empty room, with sound proofing.

Since then the Australian dollar has collapsed and the international benchmark index, the MSCI Index, has out-performed the ASX All Ords since the beginning of the year (see Chart 1).

Resources are now out and international investing is in. Geoff Wilson launched his philanthropic Future Generation Global Investment Company (ASX: FGG), Platinum came out with an Asian-focussed LIC (Platinum Asia Investments (ASX: PAI)) and many more mainstream fund managers got on the international bandwagon.

Even after the dollar has fallen 30%, there are still good reasons to invest a portion of your portfolio overseas. The growth in options now available to investors wanting international exposure is a good thing.

But the larger point is that investors almost always get a late invitation to the party. Rising prices in the resources sector gave the appearance of easy money, with little attention paid to the risks of a super-cycle bust. Financial product marketers found it easy to get new products away in that environment because resources share prices had risen. But for investors that made the chances of attractive future returns lower.

Now the same thing is happening in international investing. The fall in the Aussie dollar makes the performance of international investing options look more attractive, but it also means you get less value if you succumb to the marketing pitches.

This is rear view mirror investing at its worst, where good past performance makes the marketing sell easy and decent future returns hard.

Sadly, this is standard operating procedure for the industry; take an area of the market that has performed well, structure some products around it and flog them hard whilst the tailwind is with you. If the wind changes direction, change your products. Easy.  

You can’t really blame them for it, either. I know how hard it was to convince investors back in 2012 to forget about the resources boom on our doorstep and look instead to beaten down US banks lurching from scandal to scandal as more attractive opportunities.

But if you want to beat the market, that’s the kind of thing you need to do. The alternative succumbing to flavour-of-the month marketing pitches for average market returns, minus the excessive fees – probably won’t make you rich. It will, however, put a few more dollars in the pocket of your financial advisor or big bank product manufacturer. Your call, folks.

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