Tiger Woods’ performance should be a cautionary tale for trustees looking to use past data to predict performance, says Steve Delo
If something looks like a trend, be ultra wary. Trustees often hear references to investment managers or asset classes that are “the best performing” when there is no such thing; the “-ing” part infers a trend that will continue. What is really meant is “best performed” – one cannot presume that performance will persist.
How often are decisions taken, in the expectation of a past position/trend continuing, only for something wholly different to happen? Risk models, correlations, asset performance potential, flight plans etc are all premised to some extent on this expectation.
Consider Tiger Woods. During the recent US Open, commentators were dismissive of his chances of success, despite bullish statements by Tiger himself. He proceeded to hit the worst US Open round of his career and missed the cut. Commentators then - ex post - said this was inevitable, based on the recent form of a faded legend languishing at 190 odd in the World rankings.
So, given his 7 years of patchy efforts, who is predicting that Tiger will triumph at July’s British Open at St Andrews? Well - uh – pretty much nobody. He “is performing” too badly. Indeed, some are now thinking that Tiger will never win again at ANY of the Majors he plays during the rest of his career. That could be another 40 events!
But is it really that certain? Roll time backwards to early 2009: Woods had won 14 of golf’s Major championships in 11 years, he was reigning US Open champion and the pundits were busy naming the date he’d pass the 18 Majors record of the great Jack Nicklaus. Tiger had accrued Majors faster than one a year and even his fiercest detractors concluded he was “performing” so well that Jack’s record would be toast by 2015.
Determining trends and turning points from comparatively recent performance data is a hopeless cause exposed to spurious conclusions
So the odds on Tiger winning NO MAJORS WHATSOVER thereafter would have been astronomical! Yet that is exactly what happened – extrapolating Tiger’s short and longer term past performance proved worthless. The same can be said of any naysayers who crazily suggested in 1990 that Liverpool FC – all conquering for two decades - would not win a Premier League title over the next 25 years.
Determining trends and turning points from comparatively recent performance data is something trustee boards often try to do but it is invariably a hopeless cause, exposed to spurious conclusions. The problem with significant turning points is they only prove to be so long after the event – and are thus useless for real time decision-making!
Consider the recent media coverage of the 200th anniversary of the Battle of Waterloo. Historians have been identifying “new” turning points and making trend assertions with the benefit of deep hindsight and the blurring of two centuries. Napoleon, of course, didn’t see these turning points at the time!
You might claim it in a debate down the pub but would you bet your house on it?”
So which trends and turning points are featuring at your Trustee meetings?
The one where “long gilt yields are bound to revert to a long term 4.5% level”? Or the one where “yields are low and staying low for a very long time” or something else altogether.
I’ve heard a couple of scheme sponsors confidently predict gilt yields reverting to 4.0% inside three years, thus dismissing trustee claims for more money with nothing more than meaningless speculative words (Napoleon might brazenly use the same tactic if he’d been born 200 years later and became a FTSE plc CFO!). It’s a bit like categorically stating Tiger Woods will get to 2018 without another Major. You might claim it in a debate down the pub but would you bet your house on it? 2015 might prove to be the turning point!
Why hedge the risk of falling yields when it is one way traffic”
Determining the “likely” direction of travel on yields is an issue that trustees are really struggling with, mostly because of the regret risk - and career risk! - attached to hedging a position that plays out in the opposite direction. Around March to June last year, with yields up a bit, trustees were told there was scope to hedge interest rates at what (now) look tasty yields.
But many trustees – and plenty of sponsoring employers – decided not to, being sure the trend was upward. “Why hedge the risk of falling yields when it is one way traffic,” they said. We then, of course, saw yields fall as quickly as a Tiger Woods drive into the long rough!
Things change. Paradigms shift. Nobody knows what is going to happen.
Interestingly, this low gilt yield problem has been going on for pretty much the same time as Tiger Woods’s drought. Goodness me - they must be correlated! If Tiger Woods wins the British Open, get your LDI positions on quick!
Steve Delo is chief executive of PAN Governance and former president of the Pensions Management Institute