Can managers predict the future? Maybe not. It’s complicated.

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Frontier Advisors has recently quizzed the many managers with which it deals about their predictive capabilities. And, subsequently, this has raised questions about funds’ inhouse investment strategies, too. Investments are not as easy as APRA seems to think.

A client note to be published today (September 23) by Frontier says that predicting short-term, annual, performance numbers is difficult. Frontier’s focus, therefore, needs to be on the longer term. The paper was written by Wayne Sullivan, Frontier’s director of marketing and business development.

He said: “It is interesting to observe the impact of biases in the forecasts of future performance where we see managers typically nominating their own sectors as the likely outperformers in future periods. We like the optimism and belief in their own models and processes,” he says. “However, Frontier – unconstrained by any self-interest – has been more successful than managers at identifying where outperformance will likely come from, in terms of asset classes.

Sullivan’s report says that: “Although the sentiment toward internal teams remains generally positive, this mood has shifted as funds’ aspirations to bring more investing activity in-house. It has moved to reality. This mood shift may also reflect the growing pressure facing fund managers not just from internationalisation but from fund consolidation, which has occurred at a much faster rate than most had predicted…”

He says: “Predicting short-term annual performance is clearly unreliable and hence our focus needs to be on much longer-term horizons. It is interesting to observe the impact of biases in the forecasts of future performance where we see managers typically nominating their own sectors as the likely outperformers in future periods. We like the optimism and belief in their own models and processes. However, Frontier, unconstrained by any self-interest, has been more successful.”

– G.B.

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