Is past performance the best guide to future success?

This legendary investor believes that it is the best guide to knowing what a manager is really like over a long period.
By Larissa Fernand |  24-06-22 | 

Philanthropist and legendary Australian investor Chris Cuffe started his career in 1980 as a chartered accountant and in 1985 joined the fund management industry.

With decades of experience under his belt, he shares eight investing lessons on funds, stocks and financial advice.

#1. Past performance is the best guide to future success.

Every offer document says something like ‘Past performance is no guide to future performance’ or similar. That is exactly the opposite of how I think. It’s the best guide to knowing what a manager is really like over a long period. Past performance is extremely important and a great guide to the future.

Only long-term results are relevant. The managers I use are selected for the long term. I have no interest in their short-term results. If it looks like a manager is struggling (which I would only conclude after rolling 3-year periods), I would only exit after say a poor rolling five-year result. 

#2. You shouldn’t judge performance over the short-term. 

You can’t judge success in managing money in short periods of time.

I run a fund myself, and I assess the capabilities of a manager over five years, so I wouldn’t change a manager in a 5-year period. I might see some red lights going off at the three-year point if it’s something like that unless they did something really strange, I stick with them for a while because good managers have good times and bad times.

So if they get up and tell you their one-year results, I'm not interested in that. I want to see their rolling 5-year results and I want to understand how they achieved those results; was it one lucky stock or was it across the portfolio?

#3. Money management is a slow game.

A lot of the results of good money management doesn’t come out for years. It’s like going to the gym. There are no short cuts. Patience is really important. Slow money is better than quick money. Slow money should have fewer accidents.

#4. Active vs. Passive depends on the asset class.

The active versus passive debate is not a one-size-fits-all.

You have to look at the index before you go passive. Why would you buy an index which is 30% in banks (mainly four stocks) and 15% in resources (mainly two companies)? Talk about a risky portfolio! It amazes me people would start with that. So when it comes to Australian equities, I’d never invest in a passive fund. But internationally, say the MSCI World Index, index investing has merit.

When it comes to small-cap stocks in Australia, I think active managers of small-cap industrials generally do better than the industrials index because they can find small under-researched stocks.

#5. Look at fund size in context.

I do look at total funds under management in a manager and the types of stocks the manager buys. A small cap manager in Australia with more than $1 billion concerns me. And I am cautious about investing with a larger cap manager in Australian equities with more than say $6 billion under management. At that level, I need more convincing. It's less of a problem for a global large-cap manager operating in a massive universe of stocks.

Size can get in the way of performance.

#6. Never buy a bad stock because the price is low.

I don’t like ‘deep value’ investing where a manager is willing to buy a poor quality stock because the price is so cheap. I don’t like people saying a bad stock priced cheap is low risk.

Managers need to buy quality stocks. Adding that to a good track record and a high tracking error should mean that the fund will do well in falling markets which is a sign of a good portfolio.

I’m mainly interested in the willingness of managers to pick stocks ignoring the index. In fact, I like to see a high tracking error which is the opposite of most professionals.

#7. You can’t manufacture culture in a company.

How best to structure a company at different stages of growth provides a challenge. The way you configure a company with 20 people is different from 100 people, is different from 1,000 people. You’ve got to adapt your leadership style, depending on the size and stage of the firm.

Good leadership is paramount. People are going to watch you as the leader or the boss. You set the tone; it’s vital to walk the talk. I believe in calling a spade a spade. If something’s wrong, you’ve got the environment where people are encouraged to tell you bad news... Praise people, give them a lot of rope, plenty of trust. People will work extraordinarily enthusiastically and hard for you if they understand where things are going and they feel a part of it and are appropriately rewarded. That’s how a company builds culture.

You can’t manufacture culture. You can’t put a sign on the wall and say, ‘We are that’.

#8. Advisers matter.

The fast-moving digital landscape is impacting financial services with the arrival of robo-advice. Robo-advice is an opportunity to make advice accessible to more people moving forward. Robo-advice can bring costs down, doing the “donkey work”: capturing basic information about a client. But the human element, won’t become redundant.

In financial services, with most aspects of investing, the average investor does not have a clue where to start to find the best products. To DIY in financial services is tough.

The actual valuable advice bit will never be replaced by a machine. It’s a funny commodity, money. Individuals need someone to hold their hand, to explain what’s going on.

Training, maturity and real world experience go a long way to building an outstanding financial adviser.

The above information has been sourced from:

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