Managed Money Report - 2021
Understanding Underperformance
Understanding the performance drivers of our investments is critical to making the right investment decisions at the right time. These choices can include when to complement your existing portfolio with a new portfolio manager (PM), or perhaps move on from a current one. Understanding performance is also key because all PMs tend to go through periods of out-performance and underperformance relative to the market and their peers. Understanding why a PM is underperforming is critical to ensuring we do not make hasty decisions during short-term underperformance and, in contrast, identify those who are facing long-term structural challenges where we may need to walk away. Effective identification requires a repeatable process for evaluating PMs compared to an appropriate peer base. In this article, we outline some best practices for comparing PM performance to an appropriate peer group, understanding components of PM performance, and what investor biases to be mindful of throughout the process. We conclude by looking at three PMs who have recently struggled with performance that could make attractive investments today.
Accurate Peer Comparison: Why it is important
The first consideration when evaluating PM performance is comparing your PM to an appropriate peer group. Comparing a deep value manager to a growth manager might tell us which style has performed well recently, but it does not provide us with meaningful or actionable information on the PMs themselves. Relative performance analysis, as described below, allows us to make educated decisions on our manager’s performance while linking that performance back to our own long-term goals and investment objectives. This is key because regardless of what we own, there will likely be a manager or index that will outperform us. We should not be asking whether we owned the best performing investment last quarter or last year, but rather, relative to our goals and objectives, did our PM deliver as expected.
