The Truth About Top-Performing Mutual Fund Managers
It’s only natural for investors to look at past performance when selecting managers of either mutual funds or separate accounts. Almost everyone is impressed by a strong track record. However, investors may be making a crucial mistake by fleeing from recent losers and flocking to recent winners, especially if they act on relatively short-term results.
According to a study we conducted at Baird, at some point in their careers, virtually all top-performing money managers underperform their benchmark and their peers, particularly over time periods of three years or less. Rather than abandoning a top-performing manager during one of these periods, investors should anticipate and, quite often, accept this performance cycle. Why? By chasing performance, investors fall into an ongoing pattern of buying after share prices have risen considerably and selling after they have dropped. This behavior opposes the basic tenet of investing—buy low and sell high—and can cut dramatically into investor wealth. In addition, past performance is only part of the story. Professionals who analyze investment managers know that the drivers of performance are equally important.
Our study, which updated and built upon prior research, revealed that investors with the patience to stick with a top manager through trying times are likely to reap greater rewards than those who chase the latest winner. Although there are times when a change in manager is warranted, our research revealed that the longer an investor sticks with a top-performing manager, the better the chances of success.
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