Nobody’s perfect: The case for a long-term strategy in active management

While many asset owners recognize the value of a long-term mindset, it can be challenging to resist short-term instincts in volatile environments like the one we’ve seen in recent months. But asset owners who have a strategy to help them stay focused on the long term may avoid a number of potentially costly behaviors, including abandoning a thoughtfully selected allocation to a manager after a relatively short period of underperformance.

Signs of resilience in top-quartile managers

Our research shows that even the best managers have had to bounce back from periods of underperformance. Recently, for example, we used the eVestment database to look at the performance of active managers in the global core equity universe who had at least a trailing 10-year history (331 managers, 2012 – 2021). We evaluated their peer-universe-relative 10-year excess return rank (calculated using the MSCI All-Country World Index) to identify the top-quartile managers over the long term.

As shown in the dark-blue bars in Figure 1, 100% of these top-quartile managers experienced rolling one-year periods during which they lagged the median manager. Ninety-five percent did the same over rolling two-year periods, 82% over rolling three-year periods, 65% over rolling four-year periods, and so on.

We also looked at how much time these top-quartile managers spent among the bottom-quartile of their peers (light-blue bars). Remarkably, 92% of the top-quartile managers in the long term spent at least a year in the bottom quartile, and nearly half were in the bottom quartile over some three-year period. In some cases, three years of bottom-quartile performance is enough to get a manager put on a watch list and fired, even though that’s probably not what you want to do with a manager that will end up in the top quartile.

Figure 1

Our research found that even top-decile managers in the same global core equity universe — really the “cream of the crop” — have suffered periods of underperformance, with 100% lagging the median manager over rolling one-year periods. Nearly 90% did the same over rolling two-year periods, 63% over rolling three-year periods, and 37% over rolling four-year periods.

Importantly, we ran the same analysis for all active global core equity managers present in the market during an earlier 10-year time period (2006 – 2015) and found very similar results — suggesting that the near-term underperformance of highly skilled managers is likely a persistent phenomenon and not, say, a unique aspect of the post-GFC period.

Cultivating a long-term mindset

Asset owners invest a lot of time and effort in the hunt for top managers, and we think this data suggests that those who’ve succeeded in finding them should think twice before abandoning their conviction just because a manager has had a bad run — even, potentially, an extended bad run.

For more on this topic, including strategies to help cultivate a long-term mindset, read our recent paper here.