Should You Invest in Outperforming Managers?
When deciding on an investment manager for your money, many investors rely on performance numbers against the market benchmark. While it may seem intuitive to judge an investment manager by their past track record, studies have shown that doing often leads to lacklustre or negative results.
Let’s consider an investment manager that managed to beat the market handily from 2000 to 2011. It’s comparatively a stellar performance, many investors would have readily invested into this fund based on those numbers alone.
In comparison, this fund has lagged the market by almost 2% per year for the decade of 2012 to 2021. It is likely that these figures would cause you to take a step back, probably leaving you to decide against investing with this manager. After all, why seek underperformance when you can do better?
You might be surprised to find out that both performance numbers are actual figures from the same investment manager — Warren Buffet’s Berkshire Hathaway.
Combining both periods together, from 2000 to 2021, Buffet had outperformed the market by 2.38% per year over the 22 year period, an incredible feat! But as the broken up periods show, outperformance does not happen all the time.
Studies have shown that over the past 15 years, a staggering 92.19% of funds underperformed the S&P 500 index. Warren Buffet has proven himself as a skilled investor since starting Berkshire in 1965, however as we have seen, even he can underperform the market for long periods of time. Despite his recent performance, nobody would disagree that he is an astute investor, and given a chance, you would likely want to employ his strategies for your own investments.
At GYC, we employ an institutional level approach to fund selection, and conduct rigorous studies on investment managers before we include them in our portfolios. Decomposing returns of investment managers is important in understanding why they outperform or underperform, and understanding the manager’s process of allocating capital is vital. Performance numbers is important, but over-fixating on these figures to make decisions means missing the big picture.
The next time someone pitches an investment idea to you, showing you very good recent performance, remember to ask deeper questions such as the decomposition of those returns and the magnitude of risk that the fund was exposed to in that same period of time for a start.
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