“Why are we still invested in this underperforming manager?”
Sound familiar? You have already looked into the cause of the underperformance and remain confident in the manager, but your client is still raking you over the coals. You don’t want to fire the manager, and sense that his or her investment style is due to come back into favor. After all, even the best ones can hit a dry spell.
To show the value of patience, consultants can analyze how frequently successful managers endure meaningful stretches of underperformance. If your clients can use more perspective and patience, too, read on.
Let’s review Morningstar Direct data on mutual funds with a 10-year track record (From April 1, 2004, to March 31, 2014) and the same portfolio manager, looking at several domestic equity, international and fixed-income categories. In that data set, 26% (224 of 856) of those funds experienced notable success over the past 10 years, outperforming their benchmarks by at least 1% on an annualized basis.
What your clients might find interesting is that nearly all (98%) of those “outperformers” experienced at least one three-year period of underperformance over the 10-year period. Only five managers out of 856 were able to generate outstanding returns without experiencing at least one of these lengthy lulls. Many of the managers experienced several of those three-year dry spells. In fact, over two-thirds of these successful managers experienced between five and 12 three-year periods of underperformance. That means investors likely need to find the patience to look past multiple periods of weakness.
Tanner Howard is a consulting analyst with Envestnet | PMC.
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