The Perils of Past Performance:
How Much Does Your Manager’s Recent Performance Really Tell You?
July 09, 2008
Many professional investment managers – AllianceBernstein included – have underperformed their benchmarks since the credit market boiled over at the end of last year. In light of this, many clients may be questioning whether their managers are worth their fees. A few may be ready to ditch the pilot.
But we ask whether these clients are in danger of jumping to hasty conclusions? For one thing, there is academic evidence to suggest that investors often make poor judges of investment managers. For another, even top-rated investment managers, like Fidelity’s Anthony Bolton, have bad patches, sometimes lasting several years.
We put forward a number of ways in which investors can apply greater sophistication to analysing managers’ performance data. Even so, purely statistical approaches have their limitations: an investment strategy with a good long-term record, like our Bernstein US Strategic Value service, can throw off widely-divergent annual results more often than might be expected.
We conclude that, alongside any numerical analysis, investors must ask a number of qualitative questions about a manager’s philosophy and process if they want to ensure a more satisfying performance for their portfolios over the long term.