Manager performance is often monitored by committees over a quarterly or monthly basis, and while investment oversight is a necessary and prudent function of fiduciaries, it can also be dangerous.

I’ve argued the following in previous articles:

  • active management can add value over time;
  • even the “best” managers cannot always be expected to outperform year in and year out;
  • committees often underestimate the magnitude and duration of the underperformance they are likely to experience in the pursuit of longer-term excellence;
  • many investors’ own actions will conspire against their ability to achieve outperformance; and
  • the above statement is true for both individuals and institutions, with many institutions falling into the classic “buy high and sell low” trap when making hire/fire decisions.

Committees must be cognizant that short-term performance fluctuations represent mostly market noise and should not be used to judge skill. As Benjamin Graham noted, over the short term the market is a voting machine, while over the long term it is a weighing machine. To put this another way, short-term market movements are driven by the short-term considerations/moods of traders, while over the long term, investors’ returns will be driven by the investment fundamentals of what they own.

A short-term focus is not a new phenomenon, as John Maynard Keynes noted in 1938: “Compared with their predecessors, modern investors concentrate too much on annual, quarterly or even monthly valuations of what they hold, and on capital appreciation and depreciation generally; and too little either on immediate yield or on future prospects and intrinsic worth.” Imagine what he would be saying now in the era of Bloomberg, CNBC, day trading and hedge funds.

For any skeptics, I present a brief case study of a global equity manager that possesses a published track record dating back to the late 1970s.

Had a committee that hired this manager 30-plus years ago evaluated the performance on a monthly basis it would have seen the manager outperform the benchmark 53.7% of the time. To me, this does not sound too impressive. In fact, it’s not much better than pure random chance at 50%. A committee evaluating the skill of this manager on a monthly basis would have been disappointed nearly as often as it was happy.

Moving to a quarterly review frequency improves the situation somewhat, with the manager now outperforming 61% of the time. However, with the manager underperforming nearly 40% of the time and likely stringing many quarters of underperformance together, it’s almost certain that a committee basing its decisions on quarterly returns would have fired this manager at some point.

As the following chart illustrates, when you move out to a longer time horizon, the manager’s skill starts to come to the forefront.

As the above chart illustrates, a committee evaluating performance over a three- or five-year horizon (typical for most committees) would have seen outperformance almost three-quarters of the time. However, a committee that took a truly long-term perspective of 10 years would have witnessed outperformance of the benchmark in 99% of the 289 rolling periods.

This outperformance would have led to a significant increase in net worth for an early investor—while the index compounded $1,000 to more than $18,000, the manager would have compounded the same $1,000 to more than $114,000.

As you may have noticed, achieving investment excellence requires patience, determination and knowledge of individual and committee behavioural biases. As this article also illustrates, it especially requires committees to lengthen their evaluation horizon and to have the conviction required to stick with underperforming managers. As Warren Buffett noted, “investing is simple, but it is not easy.” Fortunately, passive investing is a perfectly reasonable low-cost alternative for those who are not the aforementioned type of investor.

However, there are also tools that an investor can use to help monitor the active managers and help guard against both hiring and firing the wrong manager. Some of these tools will be explored in my next article.

The analysis is meant to illustrate statistical relationships and behavioural finance concepts; it is not as an endorsement for active management or this particular fund.

Ryan Kuruliak is a Toronto-based vice-president with Proteus, an investment and governance specialty firm. He has more than 14 years experience in the pension and investment consulting industry.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2020 Transcontinental Media G.P. Originally published on

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