The Perils of Past Performance, Part 2

Last month, I wrote that even great investors are very likely to underperform in one of the next three-years periods. Here’s some historical evidence that even champs can sometimes look like chumps.

I looked in a database of global equity managers to see who were the champs for the past decade. My definition of “champs” was managers in the top quartile of the global equity manager universe.

Next, I looked at how many of these champs stumbled along the way. To do this I somewhat arbitrarily but not randomly (an important distinction!) looked to see how many champs had a three-year period when they looked like chumps. I defined “chumps” as being in the bottom decile or quartile versus their peers over a three-year period.

As shown in the display below, more than one-third of the champs were in the bottom decile, and more than three-quarters were in the bottom quartile, for at least one three-year period in the past decade.

Even Champs Can Look Like Chumps

Clearly, the empirical evidence supports the statistical theory I offered last month. Most managers with long-term track records of winning are likely to have losing periods along the way—often quite lengthy ones.

As we argued in a prior research paper, simply relying on recent performance to judge a fund manager can be dangerous. Applying a qualitative assessment of a manager’s ability to outperform is likely to be more rewarding.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Patrick Rudden, CFA

Portfolio Co-Manager—Dynamic Diversified Portfolio and International Head—Multi-Asset Solutions
Patrick Rudden was appointed International Head of Multi-Asset Solutions in 2013 and is Co-Manager of the Dynamic Diversified Portfolio. From 2009 until 2013, he was head of Blend Strategies. Rudden joined the firm in 2001 as a senior portfolio manager for Value Equities. He has published numerous articles and research papers, including, “What It Means to Be a Value Investor”; “An Integrated Approach to Asset Allocation” (with Seth Masters); and “Taking the Risk Out of Defined Benefit Pension Plans: The Lure of LDI” (with Drew Demakis). Previously, Rudden was a managing director and head of global equity research at BARRA RogersCasey, an investment consulting firm. He holds an MA in English from Oxford University and an MBA from Cornell University. Rudden is a CFA charterholder. Location: London

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