Everybody loves a winner and the world of investment is no exception. It would make intuitive sense that better-performing funds tend to attract a greater share of investors’ cash – and this has been borne out by plenty of studies, including work by our friends at Empirical Research Partners, which we discussed last year in Left smarting, on the subject of smart-beta products and short-termism.
Oddly enough, however, a new piece of analysis by Empirical – ‘Is security too expensive?’ – which focuses specifically on US-listed exchange-traded funds (ETFs) over the period from 2009 to 2015, finds no clear link between performance and investor flows. You can see this in the chart below, which groups the ETFs into five performance ‘buckets’ as well as each bucket’s market share.
Source: Strategic Insight Simfund, Bloomberg L.P., Empirical Research Partners Analysis – February 2016
While there is no obvious relationship to be seen between performance and fund flows, the Empirical analysts did find a much stronger one when they re-crunched their numbers. This time, they grouped the ETFs into five buckets by volatility and the resulting chart, shown below, clearly suggests a primary consideration for the market over the period since the credit crisis was avoiding volatility.
Source: Strategic Insight Simfund Bloomberg L.P., Empirical Research Partners Analysis – February 2016
The less volatility an ETF was able to demonstrate then, the more inflows it tended to attract – which, incidentally, in itself would have served to suppress volatility even further. Now, it would be going too far to suggest investors were willing to pursue lower volatility at the expense of return as the chances are they would not have been able to identify the strongest performers even if they had wanted to.
Even so, any investor who chooses a lower-volatility fund in the hope of a better night’s sleep will typically be sacrificing return in the longer term. Each to their own of course but, here on The Value Perspective, our primary focus is valuation and we ignore – or at least learn to live with – any associated heightened volatility as we pursue the investments we believe will offer the biggest returns over the longer term. We too love our winners – we just know they can take their time to emerge.