We want everything and we want it now. Everything around us is instant: messaging, email, food, jobs, medical services, travel and information. We have become so used to getting everything instantly that even a two minute wait for our computers to switch on annoys us.
This instant gratification behavior does not only apply to our everyday activities, it also applies to our investments. We expect to see immediate gains from our investments, and if not, we tend to become trigger happy and consider firing our investment managers. This behavior will most likely put us in a worse position than before.
Why do some managers perform worse than others in different market conditions? This is because active investment managers have different investment philosophies to other active investment managers, and will therefore have cyclical investment performance. As Charles D. Ellis stated in the below quote, underperformance is inevitable, regardless of how brilliant the track record of the fund manager is.
“The basic question facing us is whether it’s possible for a superior investment manager to underperform….The assumption widely held is ’no.’ And yet if you look at the records, it’s not only possible, it’s inevitable.”
Bill Miller (manager of the Legg Mason Value Equity fund), is regarded as one of the world’s greatest fund managers. His Value Equity fund beat its benchmark for 15 consecutive years from 1991 through to 2005. However, it had significant underperformance in 2006, 2007 and 2008.
Stay the course
It’s important to note that periods of outperformance historically follow periods of underperformance. Switching investment managers due to underperformance will in all likelihood put you in a worse position than if you had stuck with that fund manager over the long term. Rather understand the reasons for the underperformance instead of getting trigger happy.
There may be instances where it could be appropriate to replace an investment manager. Examples could include a change in philosophy or in the investment team, ethical reasons or long term sustained, unexplainable under performance.
So what should we do?
Decide on your criteria for selecting an investment manager up front and stick to them and practice patience. Remember that investing is a long term activity, so take a long term view and don’t focus on the short term noise. Short term underperformance from investment managers will occur.