Comparison of Investments After Challenging 6 Months
Learn how passive Intelligent Investing and the most popular mutual funds fared in the first half of 2022. We prepared a popular regular comparison of the performance of Finax's investment strategies to the competition.
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This comparison of Finax to the competition as of 30/06/2022 will discuss the following points:
- Performance of dynamic solutions
- Comparison of modeled performance and real accounts
- Performance of balanced solutions
- Performance of conservative solutions
- Utilize market declines to earn higher returns
- Comparison methodology
Although 2022 isn't over yet, it's certain to go down in history as a turbulent one.
The world hasn't even fully recovered from the pandemic when new challenges emerged. Going into 2022, the global economy was riding a wave of rising prices. Soon after the New Year celebrations, Russia replaced coronavirus in the spotlight of media headlines as it invaded its neighbor Ukraine.
The rate of inflation gathered momentum during the first six months, reaching the highest levels in four decades. Central banks were quick to respond. After 16 years, it was their turn to tighten monetary policy, i.e., to raise interest rates sharply. The terms recession and geopolitical risks found their way back into the investors‘ vocabulary.
This adverse situation has fully manifested itself in the financial market developments. Stocks around the world have been declining continuously since the beginning of the year, eventually entering a bear market (a fall of more than 20%).
Even bonds failed to provide traditional protection this year. The combination of high inflation, rising interest rates, and record bond prices, combined with a relatively strong economy, have plagued bond performance. Bond losses at the end of June rank among the all-time highest.
Never before have the financial markets endured a half-year in which stocks and government bonds reached double-digit declines. Except for selected commodities and currencies, investors had nowhere to hide in the world of publicly traded assets. Thus, after two years of solid gains, the first half of 2022 brought losses to investors.
Let's look at how asset managers in Slovakia managed to navigate this difficult period.
As you read on, keep in mind that any downturn in the financial markets will only be viewed as a great opportunity in a couple of years. And just as investment legend Warren Buffett is using the current downturn to increase his stock investments, so should every investor who seeks to be successful.
Note: All data related to the historical development of Finax portfolios are modeled and created based on the backtesting of the data. We described the method of historical performance modeling in the article: How do we model the historical development of Finax portfolios? Past performance is no guarantee of future returns, and your investment may also result in a loss. Inform yourself about the risks you are taking when investing.
The bear market present in most key stock indices alone implies the development of dynamic investments built primarily on equity investments. Red numbers glow in the comparison tables.
However, increased volatility (price unsteadiness) and lower sector correlation offer active managers room to stand out and generate so-called alpha (outperformance relative to a comparable index in terms of the fund's investment focus). The following tables show whether any manager whose solution is available in Slovakia has taken advantage of this opportunity.
They compare the results of the modeled portfolios of Finax and mutual funds in risk class 5 (return volatility above 10%) and 6 (return volatility above 15%), respectively, according to the SRRI methodology.
None of the Finax portfolios fall into risk class 6. However, the increased volatility of the markets in recent years has lifted the 60/40 (stocks/bonds) portfolio, which had been in class 4 since Finax was founded, into risk group 5.
The modeled 100% stock portfolio lost -7.5%. The results of comparable mutual funds are similar. Despite the decline in stocks over the first half of the year, long-term returns remain attractive and confirm that investors shouldn’t focus on periods of a few years.
The performance of the riskier investment solutions from class 6, which we compare to our modeled 100% stock portfolio, is more diverse.
Active management has two new leaders in Slovakia. In previous comparisons, the reins were firmly held by the Fond maximalizovaných výnosov by Asset management Slovenskej sporiteľne. During the first six months of 2022, however, it lost -23.6%, getting deprived of the performance lead among large funds and falling in comparison to Finax.
Over the past period, we endorse a former favorite in the offer of financial agents, the Amundi Funds Pioneer Global Equity fund. Its annualized return has decently outperformed the market, improving its performance over longer horizons as well.
Another interesting, still fresh venture is the Akciové portfólio fund by Eurizon Asset Management Slovakia (a sister company of VÚB banka). The fund invests primarily in global stocks via ETFs but includes active elements into its management by overweighting or underweighting exposure to the market, i.e. by timing it (we estimate this strategy from the fund's monthly reports).
So far, the fund’s managers have been successful with this approach, beating indices in both rising and falling markets in terms of gross pre-tax performance. Over the past year, the Akciové portfólio has been the only fund among dynamic investments that has managed not to lose value.
The fund only turned three years old a few days ago. We’ll see how successful its managers will be in the long term since the journey of identifying and following market trends is one of the most challenging in investing.
The change of leaders among dynamic mutual funds and the result of the largest stock mutual fund in Slovakia, the Fond maximalizovaných výnosov, point to an important fact. The biggest challenge of active management is continuity of performance and maintaining attractive returns.
Predictability and transparency of passive investing constitute its other undeniable benefits, certainly welcomed by investors. They come additionally to typically lower costs, attractive returns, simplicity of investing, and tax exemption for Slovak residents.
The following table shows how the average annual returns (p.a.) per investment translate in absolute terms (euros). It compares the net after-tax appreciation achieved on an investment of 10,000 euros in mutual funds over the past 10 years to the same hypothetical investment in a modeled Finax 100% stock portfolio.
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Comparison of Modeled Performance to Real Accounts
In past comparisons, we have introduced validation of Finax's modeled performance by looking at the development of real client accounts. We work with modeled portfolios in our communications as each client account at Finax is individual and its development may vary slightly due to differences in the timing of deposits, the timing of rebalancing, and the various discounts we provide.
The most popular accounts at Finax are the two transparent accounts of Dominik Hrbatý. His first account, with one-off deposits and an 80/20 (stocks/bonds) strategy, had an appreciation of -8.88% over the previous year as of 30 June 2022, which is completely in line with the numbers of the modeled portfolio.
Dominik made an extraordinary deposit of 10,000 euros into the account after the invasion of Ukraine by Russian troops. That’s why the value of his account on 30 June 2022 is not lower by the full loss compared to the state a year ago.
If we look at a client's account with a 100% stock portfolio, a sample of which we also used in the 2021 year-end comparison, we discover a 12-month performance of -6.99%. This is slightly better than the return of the modeled strategy (-7.45%).
Ivan Chrenko also changed the strategy in his account to a 100% stock portfolio in the second well-known transparent account at Finax. He also took advantage of the stock market downturn at the end of February with an extraordinary deposit. You can explore the development of his account here.
The investment world generally considers balanced strategies to be investments mixed of stocks and bonds with roughly equal proportions of both components. According to the SRRI regulation, balanced investments include instruments or solutions whose return volatility is between 5 and 10%.
In the case of Finax, we are talking about portfolios with a stock proportion of 30% to 50%. In our portfolios, the remainder is made up of bonds. As we have already mentioned, the 60/40 portfolio has dropped out of this group in favor of a riskier class for the first time.
An attentive reader might have already noticed that over the past year, solutions with a larger bond weighting have paradoxically underperformed riskier dynamic strategies with a larger stock weighting. The reason for this very unusual phenomenon lies in the aforementioned (and to some extent expected) unprecedentedly rough year for bonds.
We stress that this year's bond performance is not a reason for investors to change their investment strategy. The investment strategy represents a path toward the investment objective and accounts for the risk profile, expectations, investment horizon, and investment objective of the investor on the one hand, and the average historical return of the individual assets on the other hand, i.e., it fully accounts for negative periods in the financial markets.
Bonds are no different from stocks in nature. A fall in their prices also represents an attractive opportunity and higher future earnings. The loss of any asset implies a more profitable purchase.
Active managers in risk class 4 have been slightly more successful in protecting their investors' assets from downturns compared to a passive approach in most of the observed funds. Again, long horizons favor a passive approach to investing.
In our semi-annual comparisons, we regularly reiterate that bonds are an asset class where passive investing got the short end of the stick, for several objective reasons (the same would be true for commodities). We described these causes in more detail in the last year’s comparison.
In the past year, these factors have become more pronounced. More conservative passive investing has suffered from longer average bond durations (durations reflect the sensitivity of bond prices to changes in interest rates) in the ETFs we use, enabling the decline in bond prices to manifest its full force.
On long horizons, however, returns again play in favor of a passive approach even with conservative investments.
Utilize Lower Prices to Get Higher Returns
Investing is not a sprint, it's a marathon. To be successful and build a satisfying wealth, you need to look many years ahead, ideally decades.
Over these long horizons, low fees, widely spread risk, tax advantages, and avoiding bad decisions determine the outcome of an investment. Passive investing comes closest to all these parameters.
Compare the returns and cost-effectiveness of your investments with Finax Intelligent Investing. If you can't find the data for your funds or need advice, don't hesitate to contact us.
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Additionally, sales of traded assets offer a great opportunity to either start investing or transfer your investments to a better place. Buying stocks or bonds at lower prices means the potential for higher earnings in the future. This has always been the case and there is no reason to assume it will be any different in the future.
Lower fund prices also make investment switches interesting from a tax perspective. Your tax liability will not arise or will be significantly lower than at peak prices.
A third attractive advantage when switching investments is the discount Finax offers to all clients. If you document the termination of your investment with a competitor and transfer the funds to a Finax account, 50% of the value of the transferred investment will be managed for 2 years at no charge.
Start investing right today, simply online or via the Finax mobile app. Open an account in 10 minutes, we'll assist you with everything and choose the right portfolio for you, leaving you completely worry-free about your investments.
Comparison Methodology and Selected Mutual Funds
In the tables above, we have provided a comparison of the net performance after fees and potential taxation of hypothetical investments in the modeled Finax portfolios and the most popular mutual funds in Slovakia terminated as of 30 June 2022.
We define popular mutual funds as the largest mutual funds or funds with the largest net sales in the past year in each category by the type of assets in which they invest (stock, mixed, and bond). At the same time, we try to include all the key asset management companies whose services are used by Slovaks.
We compare mutual funds with Finax strategies according to the risk-return measure established by the European Securities and Markets Authority's (ESMA) SRRI methodology, which is mandatory only for mutual funds and ranks them into 7 risk categories. More information on the SRRI can be found here.
We have selected 21 funds for the comparison. Unitholders' assets held in these funds exceeded 3.6 billion euros as of 1 July 2022.
Below, we list the selected funds along with their stated ongoing charge (source Key investor information documents) and the size of assets under management in Slovakia (adjusted net asset value in Slovakia, source Slovak Association of Asset Management Companies as of 1 July 2022):
Finax charges a portfolio management fee of only 1% p.a. + VAT and a payment processing fee of 1% + VAT for deposits up to 1,000 euros (price list of services), which you can further reduce using generous discounts.
Asset Management Slovenskej sporiteľne:
- Fond maxializovaných výnosov, 1.81%, €458.8 million,
- Fond budúcnosti, 1.89%, €111.8 million,
- Aktívne portfólio, 1.62%, €394.9 million
- Fond zodpovedného investovania, 1.32%, €159.3 million.
- Pioneer Global Equity A EUR (C), 1.9% + performance fee, €124.8 million.
- ARTS Total Return Global AMI, 2.55% + performance fee, €69.1 million.
ČSOB Asset Management:
- Rastový, 1.94%, €73.2 million.
Eurizon Asset Management Slovakia:
- Akciové portfólio, 1.44%, €221.0 million,
- Flexibilný konzervatívny, 1.38%, €103.4 million,
- Dynamické portfólio, 1.70%, €410.5 million,
- Active Magnifica, 1.51% + performance fee, €153.1 million,
- Active Bond, 1.39% + performance fee, €153.7 million.
- Manager Selection Fund – MS 70 R, 2.17%, €110.6 million.
- Global Index, 3.64%, €126.0 million.
Tatra Asset Management:
- Globálny akciový fond, 1.27%, €79.5 million,
- Private Growth 1, 1.38%, €179.3 million,
- SmartFund, 1.37% + performance fee, €187.3 million,
- Private Growth, 1.20%, €162.1 million,
- Balanced Fund, 1.17% + performance fee, €178.4 million.
UNIQA Investment Company:
- Selection Global Equity, 1.79%, €64.9 million.