Can’t Trust’em

It pays to be skeptical of financial product pitches.  Investments that are sold rather than bought are often inferior and loaded with fees.  Marketing (even for good funds) is filled with cherry-picked data, but that’s the job of the marketing folks – make the product look good.  However, sometimes a pitch comes across my desk that goes beyond marketing and makes me wonder whether the money manager is dishonest or just incompetent.  Either way, they get filed under ‘Can’t Trust’em’.

The latest entry into my ‘Can’t Trust’em’ file is a manager that absolutely crushed the S&P 500 over the last 10 years.  They lost a ton less than the index during the crisis and were up over 60% in 2009.  Returns for other years were pretty middling, but they shined when it counted the most, right?  I looked around on their website a bit and found a document called ‘BACKTEST’.  Why would a strategy with almost 20 years of history need to post a backtest?

Backtest

A backtest is when a money manager has a computer calculate what their strategy would have done in the past.  If you’ve got a great new idea for an investment process, you backtest it to see how it would have done over past market regimes.  I have never seen a bad backtest.  Today’s backtests usually show a strategy avoiding equities during the financial crisis and getting back in early in 2009.  Bond funds would be heavy long-term Treasurys then would have chased yield.  They would have run Marshawn Lynch instead of passing it at the goal line.  Netflix, Amazon, and Apple all look like obvious buy and hold opportunities in backtest and they knew all along that Bruce Willis’s character was dead in The Sixth Sense.

What’s Going On Here?

It turns out that the manager had changed investment strategies in 2014.  Instead of showing their actual returns prior to 2014, they listed the hypothetical backtested returns.  Not surprisingly, the strategy’s actual returns were nowhere near what was advertised in the marketing material.  Oh and all the returns were shown gross of fees.  Can’t Trust’em.