Identifying a top fund is one thing, but sticking with it is another; even the very best active fund managers underperform for long periods.
A Vanguard study recently published in the Journal of Investing examined the returns of 1,173 US funds that had outperformed over a 25-year period. Even the top performers went through periods of pain, it shows.
Over a one-year period, the best fund managers can expect to underperform between 40 and 60 per cent of the time. Almost 100 per cent underperformed over one-, three- and five-year periods. Eight out of 10 long-term outperformers had at least one five-year period where they were in the bottom quartile of performers.
Severe shortfall
This underperformance can be severe – a majority underperformed by 20 per cent or more.
In other words, underperformance is inevitable and unavoidable. And yet, a 2016 State Street survey of institutional investors found 89 per cent would look to replace their manager if they underperformed for over two years.
Investors are left in a tricky position. It’s not enough to be able to identify a top performer – you must be willing to stick with them through the tough times.
