The Truth About Top-Performing Mutual Fund Managers
by Aaron S. Reynolds
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.
In this article
- Even the Best Investment Managers Underperform
- Shortsighted Investors Leave Wealth on the Table
- Why a Long-Term Perspective Is Important
- Does It Ever Pay to Make a Manager Change?
- A Lesson in Patience
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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.
This article explores the tendency of top managers to underperform and the reaction of investors when they do. It also offers insights to help investors uncover the reasons behind a manager’s performance and make informed decisions based on longer-term results.
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Discussion
SO WHERE IS THE LIST OF THE TOP PERFORMING MANAGERS IN EACH CATAGORY??
posted about 1 year ago by Larry from Minnesota
One might wish to use the balanced mutual fund PRPFX as a reference when evaluating the short and long term performance of mutual funds. It has been a steady performer for over a decade, And for ETFs it is hard tob
posted about 1 year ago by Alfred from North Carolina
An ETF that has been a steady performer over both the short and long term in GLD. I use it as a reference for compareson of other ETFs.
posted about 1 year ago by Alfred from North Carolina
Excellent article. Confirms what many of us have learned the hard way over the years, ie, simply "chasing the stars" is not the smart way to invest.
posted about 1 year ago by Daniel from Alabama
What a stunning result! If you select the top performing mutual funds over the last ten year period, even though they may have several years of under performance, they still end up being the top performing funds. Remarkable. The issue is, what will they do the next ten years, and the answer is, nobody knows. Selecting funds for the future from the rear view mirror is a fools game. Index, index, index.
posted about 1 year ago by Louise from Washington
I am with Larry from Minnesota. Where is a list of say the three top-performing managers in each category? That would be great to know and do some research on, such as, what is the ratings given by Forbes and other financially oriented magazines.
posted about 1 year ago by Frank from California
Whoah, anyone with the brains and sitzfleisch to read this journal and Yahoo Finance (etc.) has the ability to outperform the best managers. I've been tracking my own results vs. several good mutual funds over the past decade. Personally, much better results both short and long term (15%+ per annum), than Fidelity et al.
This is not rocket science, people. My advice, fire your mutual fund company, and buy a few individual bonds some promising stocks. Stop paying somebody to make your investments for you, and reap the rewards of your own decisions.
posted about 1 year ago by Bill from Massachusetts
This is an interesting article and does draw attention to some good general principles that savvy investors should always keep in mind such as 'be patient', 'invest long term', 'don't chase short term results' among them. I've heard all of that so many times I don't need to hear them again. But this article, like so much of the money management commentary on investing strategy, fails to escape the vested interests of the author (A. S.Reynolds), his title(senior portfolio analyst) and position(in Baird's Advisory Services Research) with his sponsor and primary audience(Robert W. Baird & Co. Wealth Management Co.). He is just making a living. After all of those influences are extracted there isn't much left that has any real meaning... It is pablum to draw in new customers and, thank you very much but I don't have tome to waste reading more advertising published under the guise of 'good investing insights'. If the author and his sponsor was courageous he would publish the study results in full - all of the raw data. Then he would go beyond the generalities and give his reader some real insights that are useable without getting a degree in finance. I'm surprised that AAII is still publishing items of this questionable quality.
posted about 1 year ago by James from Pennsylvania
Simply a fund manager saying he/she outperforms stated benchmark is not enough. We have to take closer look at the fund's investment "style"; if the manager claims they are outperforming S&P 500, analyze their portfolio risk profile. For example, if the manager runs the fund like a hedge-fund, of course he's gonna outperform S&P. What value-add does he offer? I can just goto Vanguard and buy the index ETF myself, much cheaper.
posted about 1 year ago by David from California
Interesting in that even the best have periods of underperformance. But hard to tell what if anything actionable comes out of this, since the study sample chosen (superior 10 year performance) more or less guarantees that you'd regret having dumped their funds. It doesn't tell you anything useful about when you should dump a manager, nor whether a procedure such as looking for inferior 3 year performance to change managers gets you better or worse performance in a replacement manager. As a trivial example, what is the forward-going performance after a downgrade for all managers?
posted about 1 year ago by Jim from Michigan
Most if not all of the findings of this article can be explained by random variations in funds returns, without any proof of skilled top performing funds managers. Will the lucky managers from the past 10 years be lucky again in the next 10 years? The 370 funds selected had an average annual return of 3%. Lets look at their performance after a downgrade: If they under-performed for three years, say by -2%, they must on average have a return of 5% for the other 7 years to make the average 3% over 10 years. No wonder they do on average better in the next 3 years out of these 7 years, after a downgrade. Similar arguments can be made for the other statistics in the article. This requires no investing skills; it is based on self-fulfilling after-the-fact statistics.
posted about 1 year ago by John from
I read the comments first and was happily surprised at how many people get it - that beating the market consistently is tough and finding an investor that can consistently do it is even tougher, so be happy with an index fund that over time and after expenses will beat the vast majority of the actively managed funds. The sucessful long term active investor might in fact just be lucky and one of the normal distribution outliers. This all assumes we are talking about investing in efficient markets.
posted 11 months ago by Rick from Virginia
I find the study to general and not particularly useful for me. Give me some real examples, i.e. Talk about Bill Miller, Ken Heebner, Bruce Berkowitz and other fallen stars and what the odds are for them to come back.
posted 11 months ago by Rudiger from Florida
