The Almost Perfect Contrarian Indicator
Advisers are constantly bombarded with email updates and sales kits from fund houses, especially the well performing ones. The account managers are just doing their job promoting their funds. This can also be a good source of information for advisers, be it for performance ranking, latest economic conditions or even academic information. However, adviser must conduct their own due diligence as no fund house would criticize their own funds. Not all advisers do that.
Hot funds are promoted aggressively by fund houses. I remembered a particular fund which managed to do well in 2008 being marketed very aggressively. Performance updates were sent out regularly and numerous product trainings were given. Some advisers were sold and they too promoted this fund heavily to their clients. During a recent in house investment training, an update on this fund was given. Most were shocked by the poor performance. Few knew about it because the performance updates has stopped some time ago, presumably due to the under-performance.
China funds were also promoted heavily recently. And what happened to the Chinese market?
Adding an asset class, sector or geographical allocation to the investment portfolio for growth and diversification purposes is definitely all right. To disregard asset allocation principles and dump all or most of the investment into a hot theme is definitely a no no. Sadly this is still quite prevalent.
Many a times, a best performing fund or sector would become the worst performer when investors rush into it. Perhaps, we can use the level of promotion as a form of contrarian indicator…
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Tags: Investment Blunder
How true.
It makes me wonder about the Henderson Short/Long fund that i am eye for sometime. It has made remarkable gains so far compared to other china funds.
What do you think?
Hi Paul,
My only comment is to take note of the risks for your portfolio. Go look at how the fund has performed compared to others over the last 1 month when the China market went through some rather rough time. You have to match your risk appetite to the kind of performance this kind of fund gives you.
Do not chase after hot funds.
Sample selection bias, survivorship bias, you name it they did it!