Roy Varghese
Director,
financial planning practice,
ipac Singapore

2009 has been a topsy-turvy year. The first quarter was filled with pessimism over economic recovery.

Negative returns in the first two months exacerbated the paper loss for most investors in the last quarter of 2008. Then unexpectedly and in unison, global markets anticipated the end of the recession in March. The result was a powerful rally over the last six months. Now, investors are nervous about whether the appreciation in their portfolios is on solid ground or if there will be another 'October curse'.

In the midst of all this zigging and zagging, there are several questions on most investors' minds. How have my investments done in 2009 so far? Has my portfolio recovered adequately since September 2008 to be on track again? How did my fund managers perform against their benchmarks? Which benchmarks are relevant to my portfolio? Am I taking too much risk? Or am I being too timid and will I miss out on a bull market if projected 2010 GDP growth rates keep the market momentum going without a double dip? Indeed, how has my portfolio performed since its inception?

Most investors have a natural inclination to measure their returns annually on a calendar-year basis. Tracking calendar-year annual returns is an artificial indication of short-term results. But it satisfies our conditioning for a universal convention for performance measurement.

A look at selected bourses around the world shows that the best-performing markets through August are from the developing economies. The fundamentals in non-OECD (Organisation for Economic Co-operation and Development) countries, unlike the developed economies, were relatively intact in spite of the global recession. Perhaps the market correction in 2008 was overdone and investors reacted to the spring rally by driving up equities in the emerging markets.

The United States, on the other hand, as represented by the S&P 500, is near the bottom of the pack (US tech stocks on Nasdaq proved to be a winning exception). Clearly, the domestic recession, marked by reduced consumption and lower corporate earnings, held back US stocks in the last six months.

Another conclusion specifically for US equities is that higher-quality shares, as measured in terms of Standard & Poor's equity-quality ratings, have recorded the lowest capital growth in 2009 so far. Buying the broader US market through an index in itself was not enough to achieve above-average returns; instead, an investor had to take on additional risk (by investing in lower-quality US companies) to be ahead for the year.

Of course, the next logical question is: Which countries or sectors will be the winners for the rest of the year and beyond? Should investors who have registered in excess of 25 per cent net returns for the first eight months in 2009 feel contented participating in the market rally?

Investors who have remained in the market since the September 2008 meltdown and courageously contributed to a regular investment programme in the last 12 months would most likely have achieved an outcome of recovering more than half of their unrealised losses. Yes, these investors should enjoy a sense of satisfaction of not only surviving a monster bear market but also having acquired deeply discounted quality shares along the way.

The next set of issues revolves around fund managers' performance. Managers of retail unit trusts and managed portfolios document past performance with comparisons against benchmarks that the fund managers selected to beat from the outset.

The investment objective and securities holdings of all global equity funds may not necessarily mirror the MSCI World Index, for instance. Yet, investors compare funds with identical benchmarks and draw the wrong conclusions on the alpha delivered by these managers. The risks taken by diversified global equity managers are not the same.

Another serious error in past performance analysis arises because the inception dates for funds differ. The fund manager's returns and the investor's returns will be different, depending on when investments were made or capital was withdrawn at both levels. The only accurate method of calculating portfolio returns is to track actual cash flows into and out of each fund. This is not an easy task for most retail investors.

Judging fund managers by past performance as an indication of future results is not entirely meaningful. However, judging how your managers have dealt with the unprecedented plunge in 2008 and the ensuing rally in 2009 up to this point will be a clear indication of the reliability of the execution of trading strategies by these professionals. A fundamental deviation from the mandate may suggest that the fund manager panicked or took risks to compensate for irrational behaviour. Measuring risk-adjusted returns over different market cycles can be one method for meaningful manager assessment.

For individual investors, the only relevant benchmark for measuring long-term performance is the required return we set for ourselves to achieve our unique investment goals. It is not MSCI World Index, S&P 500, the Sraits Times Index or even the Singapore Consumer Price Index.

For a managed portfolio, the components of the required rate of return will be what the strategic asset allocation will deliver, after fees and charges, in the medium to long term. If 7 per cent per annum is the required net-of-fees long-term rate of return for a moderate risk investor, then that is the appropriate personal benchmark not only for the managed portfolio, but for the entire spectrum of investment assets. Further, it is not just the liquid investment portfolio that should be measured once every few years.

The growth in personal net worth (with and without the primary residence) is the ultimate parameter to be tracked. Have you measured the growth rate of your net worth over the last five years or more? Personal experience confirms that investing in Singapore private property over the last 25 years would have yielded a compounded annual growth rate of 12 per cent that included three serious down markets.

But property alone cannot provide the liquidity dimension for financial goals prior to retirement. Cash and CPF savings do not provide protection against the loss of purchasing power. The answer lies in a managed basket of liquid assets with a core portfolio of globally diversified equities, bonds, Reits and alternatives.

To recap, it matters not a jot what someone else has achieved in the current economic climate. The only meaningful way to track portfolio performance is to see if the investment objectives are framed correctly. In short, the key performance indicators must be personalised so that you don't take more risks than you need to and give yourself the right score.

The writer is Foundation Adviser at ipac Singapore. These views are his own. He can be contacted at roy.varghese@ipac.com.sg