Recognize That Short-Term Underperformance Is Inevitable

“The basic question facing us is whether it’s possible for a superior investment manager to under-perform....The assumption widely held is ’no.’ And yet if you look at the records, it’s not only possible, it’s inevitable”~~Robert Kirby, Founder, Capital Guardian Trust Company

When faced with short-term under-performance from an investment manager, investors may lose conviction and switch to another manager. Unfortunately, when evaluating managers, short-term performance is not a strong indicator of long-term success.
A study below illustrates the percent of top-performing large cap investment managers from January 1, 1998 to December 31, 2007 who suffered through a three year period of underperformance. The results are staggering:
(i) 98% of these top managers’ rankings fell to the bottom half of their peers for at least one threeyear period.

(ii) A full 75% ranked among the bottom quartile of their peers for at least one three year period, and

(iii) 43% ranked in the bottom decile for at least one three year period.
Though each of the managers in the study delivered excellent long-term returns, almost all suffered through a difficult period. Investors who recognize and prepare for the fact that short-term under-performance is inevitable–even from the best managers–may be less likely to make unnecessary and often destructive changes to their investment plans.