Bank of America’s research on why fund managers underperform points to the conundrum of conviction in fast-changing markets.
It’s that time of the year when fund managers around the world pick up their pens, calculate their returns and write to their investors to offer insight, hope and, occasionally, excuses.Both growth and value managers have struggled in the past six months.Your columnist’s study of a selection of letters from Australia, Britain and the United States suggests these letters fall into five categories.
Next come the humbled. They’ve had a shocker, they know where they went wrong, and they won’t make the same mistake again. But for all the insights in these letters, what you won’t find is any admission that backing a fund manager is generally a losing proposition.Last month, Bank of America’s Sydney-based quant guru Nigel Tupper, published research in which he analysed 2000 funds managing $US12 trillion , and found only 32 per cent of active funds outperformed their benchmark in the 2021 financial year. Only 33 per cent outperformed over the past five years.
Value outperformed for the best part of two decades during the 1990s and 2000s, but investors who assumed it couldn’t lose were badly stung in the 2010s.Linked to this is what Tupper calls “static allocation”; for example, an investor may buy quality stocks that are inexpensive, and never deviate. Finally, there are two things that fund managers must do that immediately puts them behind sharemarket indices: hold cash for redemptions, and pay transaction costs.
We tend to lionise managers whose specific investment process and worldview delivers success, even if the data tells us this manager can’t be right in all market conditions. And we tend to look down on those whose style drifts.
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