CXO’s Evaluation of Ken Fisher’s Stock Picks in Forbes

There are many questions to ask and a lot of research to do before you find a money manager you’re comfortable with, including understanding their performance, costs and level of service. This can be a challenging task, especially so since many investors value different qualities in a money manager. Some investors focus on client service and others on reputation or fees. Some investors pay particular attention to past performance to try to assess the likelihood of future success. However, past performance does not guarantee future results and it’s even less telling when that performance isn’t evaluated correctly.

We occasionally get questions from prospective clients about an early 2016 article written by CXO Advisory Group, a third-party that writes editorials on investing topics. In the article titled “Forbes Evaluates Ken Fisher’s Stock Picking,” CXO attempts to evaluate the performance of Ken’s stock-picks published in his Forbes columns.While we respect CXO’s efforts and have no doubt they were well-intentioned, we disagree with their conclusions. What’s more, we believe some of the conclusions run counter to CXO’s own findings. Here, we’ll address the problems with CXO’s findings and provide some helpful tips on how to properly assess portfolio performance.

CXO Article Limitations

In the article, CXO evaluated the performance of a subset of Ken Fisher’s stock picks published in his “Portfolio Strategy” Forbes column, which ran from 1984 – 2016. The article used Forbes’ methodology of assessing the performance of Ken’s stock picks over a 12-month period, placing each year’s picks into an equal-weighted portfolio measured against the S&P 500 Index. The merit of such a methodology in evaluating portfolio performance is questionable on its face, and we outline its specific limitations below. Further, we do not believe this analysis is useful for evaluating Fisher Investments’ performance.

1. Ken Fisher’s stock picks in Forbes are not representative of Fisher Investments’ investing strategy or performance.

In his Forbes columns, Ken wrote for an audience of mostly self-directed investors looking for timely stock tips they could incorporate into their own, active investing process. Fisher Investments’ client portfolios generally did not hold the securities referenced in Ken’s Forbes columns.

Fisher Investments’ investment methodology focuses on building well-diversified portfolios personalized and aligned to each client’s unique investing goals. Client portfolios are built using our time-tested, top down investment process, which is led by the firm’s five-member Investment Policy Committee and supported by a large Research staff. These diversified portfolios can feature dozens of securities and incorporate many different investment themes. These securities, themes and portfolios also change over time based on Ken and the Investment Policy Committee’s forward-looking market views.

2. Forbes’ evaluation measures the performance of Ken’s global stock picks against the US-only S&P 500 Index.

In their analysis, Forbes compares columnist stock picks against the return of the all-US S&P 500 Index. While the S&P 500 can be a good proxy to understand US stocks’ general direction, doing a performance analysis relative to the S&P 500 alone can be misleading (compared to a global index like the MSCI World). In his Forbes columns, Ken (and many other columnists) often wrote about non-US stocks alongside US picks. An inappropriate comparison like this could under (or even over) represent the performance of his picks. For example, in a year where one of Ken’s picks increased 15%, but US stocks broadly increased 10%, Ken’s picks would look very good. However, if most of those picks were Non-US stocks, and Non-US stocks broadly increased 25%, then Ken’s picks would have actually performed poorly when compared apples-to-apples. This is a hypothetical example, but it demonstrates how using inappropriate comparison measures can be misleading.

3. Forbes calculates performance to the end of each pick’s calendar year, which we believe is arbitrary and can be a relatively short timeframe.

Forbes’ comparison only measures how stocks performed in the calendar year that the picks were published. This timeframe is arbitrary, relatively short, and individual stocks may have fared differently over other (albeit likewise arbitrary) timeframes—e.g. three months, two years, five years etc. Most investors have much more than one year to plan for and such arbitrary time periods likely don't tell you much about long-term performance. Additionally, there is nothing special about the calendar year—cycles, context and circumstances often matter more.

4. The article leaves out nearly half of Ken’s Forbes columns.

CXO’s report only analyzes Ken’s picks from 1998 to 2015, but Ken wrote the column from 1984 to the end of 2016. So while the article does measure 17 years of his columns, it neglects nearly the entire first half of Ken’s tenure with Forbes! We have no idea why CXO (and Forbes) looked only at the period they did, however a thorough analysis might have looked at his entire tenure.

All this said, Ken is highly regarded and recognized in our industry. Ironically, CXO is one of those organizations who have recognized Ken’s stock-picking prowess in the past, ranking him #2 out of 68 industry professionals on its “Guru Grades” list in 2013 for market forecasting accuracy. In this study, they compared Ken’s stock picks against those of 67 other “gurus” in the industry from 2005 to 2012. 

Helpful Tips for Evaluating Money Manager Performance

CXO’s evaluation of Ken’s stock picks is not representative of Fisher Investments’ performance. But what if you wanted to explore Fisher Investments’ or any other money manager’s performance? Investors and the media often attempt to evaluate money manager performance, but many do so inaccurately. When doing these calculations, here are some important tips for better gauging their performance:

Make appropriate comparisons.

If you want to look at a manager’s performance, it’s better to request the manager provide the long-term performance of their portfolio strategy. Make sure you are comparing an investment company’s performance against an appropriate benchmark. Often, money managers will publicize the benchmark they are using for each strategy. However, if you need to find this comparison point yourself, make sure you’re using an appropriate measuring stick. Optimal benchmarking requires comparing against a broad index resembling a portfolio’s overall strategy, asset allocation and composition. Comparing a manager’s performance to an unrelated index can lead to ill-advised moves and inaccurate conclusions that can hamper your long-term returns.

Reference timeframes relevant to your goals.

If you’re a long-term investor, don't assume a single year’s performance is all telling. Most investors have much more than one year to plan for and short time periods likely don't tell you much about a money manager’s abilities. It’s better to judge a money manager’s performance against an appropriate benchmark over a reasonably long period of time (such as a full market cycle) relative to your unique investment time horizon.

Account for fees and transaction costs. 

Most money managers or investment advisers charge a fee for their services and clients normally incur trading, mutual fund and other fees as well. To understand a money manager’s performance, you should account for all fees and costs.

Include dividends and interest.

Index performance measures often vary. For example, one important distinction is “price return” versus “total return.” Price return only accounts for how much stock prices have changed over a period. Total return takes into stock price changes and the impactofdividends and interest accrued over time. Investors should be most concerned with total return since it is more representative of the return an actual portfolio would generate.

Remember to consider the impact of deposits and withdrawals.

When judging the performance of a financial adviser handling your savings, you’ll need to account for cash flows. Many investors make the mistake of simply comparing ending portfolio value relative to beginning value or some arbitrary high water mark. These comparisons are an inaccurate gauge of portfolio performance if you incurred cash flows—took withdrawals, made deposits, etc. Instead, you must use geometrically linked, time-weighted return, which is basically a return calculation that removes the impact of contributions and withdrawals. Your money manager should be able to run these calculations for you to show what their actual performance is.

Use risk-adjusted returns for a more accurate picture.

It may feel good if your money manager wildly outperforms a market benchmark one year, but it could also mean your money manager is taking on excess risk. One common tool for measuring risk-adjusted returns is the Sharpe ratio—the average return of an investment minus the risk free rate divided by the investment’s standard deviation. If your portfolio’s Sharpe ratio is wildly higher than that of your benchmark, your money manager could be taking on excess risk.

Finally, remember that while these performance evaluation tips should help you generate more accurate comparisons, fund or portfolio performance is just one part of a money manager’s service. We believe there are more important factors to consider when choosing a money manager.

About Fisher Investments

You deserve an adviser you can trust and feel comfortable with, and since we first began providing investment management services in 1979, our goal has been to put clients first. We believe this focus on putting investors, like you, first is why we’ve successfully managed portfolios for 39 years and currently serve over 69,000 private clients globallyi. As a client, you can expect the following from us:

Personalized Portfolio Management

  • You will receive a portfolio tailored to your individual circumstances and designed to maximize the likelihood of achieving your long-term financial goals.
  • When choosing your optimal long-term investment strategy, Fisher Investments will evaluate many factors including your cash flow needs and investment time horizon.
  • Likewise, we will evaluate global market conditions and adjust the country, sector, sub-sector, stock and other portfolio characteristics based on our forward-looking market views.

Proactive, World-Class Service

  • You will receive proactive service from a dedicated Investment Counselor who keeps you updated on your portfolios and answer any questions you might have. Your Investment Counselor will know your personal goals, will reach out proactively and provide any day-to-day service you might need.
  • Your Investment Counselor will also help keep you disciplined to your investment strategy to maximize the likelihood you reach your long-term investing goals. Importantly, your Investment Counselor is a service person, not a salesperson. Because Fisher Investments is a fee-only adviser,  our counselors will never call to sell you products or services.
  • You will also receive a number of educational communications—written, audio, video and in person events. Our objective with these is to keep you educated and informed—two key factors to long-term investment success.

Expertise and Experience

  • Fisher Investments’ Investment Policy Committee, the primary decision-makers in your portfolio, has over 130 combined years of industry experience.
  • Ken Fisher, Executive Chairman and Co-Chief Investment Officer, has written eleven books on investing and wealth creation, including four New York Times bestsellers.
  • Corporations, pension funds, endowments, and other organizations conduct in-depth analysis and thoroughly scrutinize a number of investment advisers before deciding which they will hire. Fisher Investments and its affiliates have been evaluated and hired by over 150 such organizations globallyii.

If you are interested in learning more about Fisher Investments’ services, fees, or performance, please call and speak with one of our qualified representatives today at 888-823-9566.

iAs of 09/30/21.

iiAs of 09/30/21.