The Truth About Top-Performing Mutual Fund Managers

by Aaron S. Reynolds

The Truth About Top Performing Mutual Fund Managers Splash image

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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Aaron S. Reynolds is a senior portfolio analyst in Baird’s Advisory Services Research at the private equity and wealth management firm Robert W. Baird & Co.


Larry from Minnesota posted over 2 years ago:


Alfred from North Carolina posted over 2 years ago:

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

Alfred from North Carolina posted over 2 years ago:

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.

Daniel from Alabama posted over 2 years ago:

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.

Louise from Washington posted over 2 years ago:

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.

Frank from California posted over 2 years ago:

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.

Bill from Massachusetts posted over 2 years ago:

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.

James from Pennsylvania posted over 2 years ago:

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.

David from California posted over 2 years ago:

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.

Jim from Michigan posted over 2 years ago:

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?

John from posted over 2 years ago:

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.

Rick from Virginia posted over 2 years ago:

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.

Rudiger from Florida posted over 2 years ago:

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.

Phil from New York posted about 1 month ago:

The more I study investing, the more I have evolved to picking my own equities. However, owning some mutual funds and ETFs is still a good idea for core holdings with at least one index fund to mollify any volatility in individual stocks.

Lou H from Illinois posted about 1 month ago:

Where can we find the top managers in the various categories and what their funds are?

Charles Rotblut from Illinois posted about 1 month ago:


Our annual mutual fund guide, shows year-by-year performance for mutual funds. Returns ranking in the top 25% of their categories are bolded.

The forthcoming March 2014 Journal will review the funds with the best five-year performance.


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