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What’s more important in this industry – Perception created by a marketing story, or the Reality of being measurably valuable?

Sometimes I’m not sure

As former basketball players, we know competition, and we know firsthand that when it’s time to win, it’s not how good you think you are but what you do, that gets it done. And the measurement of the success or failure of what you do is then right there on the scoreboard.  Seems obvious, but that requires that you actually look at the scoreboard, not just the marketing story.  Know the story or the stated objective – measure the results.  Investors should approach managing their money with a similar mindset.

We had a recent experience with a large fund company that started the thinking that led to this post.  It was a wonderful example of Perception Vs Reality.  As a new firm that looks at and does things differently from most in this industry, we are eager to get perspective from wherever we can that might help us better understand and chip away at the dominant paradigm.  We regularly reach out to others in our industry as one source for that input and were able to have a long conversation with a respected employee from the unnamed fund company I mentioned.  We were appreciative of his time.

He was passionate and convicted about his firm and how good they are at what they do.  His perspective was convincing, and that’s what got me thinking – was it reality?  Are they really that good?  They must be, after all they do manage A LOT of money.  The story is one I have heard, and it’s compelling, but I had never dug in. I decided to check their scoreboard.

I started at their website, which was really cool.  It offered video after video introducing their PhD’s and other credentialed staffers. It also showed me their headquarters which was without question impressive and must have cost quite a bit.  Based on the presentation of their firm – these guys are good.

Then I moved to review the performance of their “Core” funds that are devoted to US Stocks.  Perfect – that’s our focus at Aptus, so I knew it would be a space we were familiar with. There were 6 funds, and collectively, over $40 billion of assets invested in them.  The benchmark for these funds was the Russell 3000 and the story is returns in excess of the benchcmark.

This is where I got confused.  Sometimes a chart says it best.

The chart below shows each fund at the end of April (I left out the actual ticker), the assets in the fund, the number of holdings, and then columns for 3yr ,5yr ,10yr and Inception performance against the benchmark.  The red boxes with an X denote that the fund is trailing the benchmark over that specific time frame, and the green boxes highlight performance above the benchmark as well as show the amount of outperformance. DFA

What does this chart tell us? I’ll save the investment specifics for another post but what I recognized in these 6 funds that manage over 40 billion of assets: Perception is Not Reality.  A good story and national distribution have overcome a lack luster scoreboard.

As an investor – understand who you work with and the strategy behind how your money is invested.  Know what your options are and look at the scoreboard from time to time.  No matter how good the story is, be sure the potential value is a reality.  Focus on expertise, cost, structure…and remember, simple beats complex.