One of Warren Buffett’s more commonly referred to quotes “only when the tide goes out do you discover who has been swimming naked”.
As we have recently seen a correction after an extended period of growth, now is an apt time to refer to this quote when analysing the performance of a portfolio.
When economies are strong, business conditions are good and you are in the bull stage of the market cycle cracks in weaker companies can be covered over. When we have extended periods of these favourable conditions there becomes a sense of euphoria further driving the investment in shares both good and bad. Then when the tide turns and business conditions deteriorate it becomes clearer which companies are solid and which are not.
As the tide comes in so too it must go out, it is inevitable. So Warren Buffett’s metaphor refers to the “tide going out” being the economy deteriorating and the “swimming naked” being the poorer run companies showing their true colours and incurring larger falls in value.
With regard to fund managers, the recent market downturn can be used to determine if they have been investing in companies which have been “swimming naked”. It is a good time to tell whether they are investing in the manner/style that they say they are.
For example, a value style fund manager of Australian shares should have been underperforming through the latter stages of the bull market but they should now be holding up better than say a growth style manager or the index (S&P/ASX 200).
Without delving deeper into the specific styles of fund management I have used the value style example to make a point. You cannot choose a fund manager based on performance alone you also need to understand what stage of the economic cycle their investment style suits. We see this time and time again with people looking at the strong performance of XYZ fund and wanting to switch at the worst possible time, in effect they could be catching a falling knife.
The recent correction can create an even bigger timing risk when switching funds. Fund managers using unlisted assets have a delay before market movements are reflected in their performance reports. As they require a physical valuation to be done which may only be quarterly, half yearly or at worst yearly. Compared to fund managers investing in listed companies which will have any correction show up straightaway in their unit price.
Before you make any decisions to switch fund manager or even to change super provider altogether I would encourage a discussion with your adviser to ensure your best intentions are not based on a false premise.
Warren Buffets quotes are great truisms to follow and can make the complicated seem simple. My interpretation is that swimming naked isn’t much fun when the tide goes out…. I would recommend swimming with clothes on and between the flags!