Manager Underperformance - II

| June 19, 2018
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Morningstar has recently released a new white paper on manager underperformance.

In short, even the best managers will go through period of underperformance.

I know, I already told you that: here, here and here or search my blog for titles such as Death, Taxes & Manager Underperformance or Would You Fire!

However, their finding show this could last longer than most can withstand.

Here are their findings:

  • We investigate these measures empirically for a global set of active funds over the 15-year period starting January 2003 and ending December 2017.
  • We find that for funds that outperformed their benchmark trailed that benchmark for an average of nine to 12 years sometime during that period.
  • Conversely, we find that funds that ended up underperforming their benchmarks were ahead of those benchmarks for comparably long stretches.
  • The main implication of these findings is that standard performance-measurement periods, such as three, five, or even 10 years are far too short to evaluate a manager with confidence.
  • Investors who believe they picked a good fund must show more patience than is commonly assumed.
  • The implications of these findings for investors, consultants, and funds-of-funds managers are clear. The designers of asset management firms’ portfolio-manager evaluation systems will also need to consider incorporating longer time periods in their methodologies.

In short, like an athlete searching for mastery, any good capital allocator must ask themselves, “What is my or my clients capacity for pain?”


Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R = O


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