While many asset owners recognize the value of a long-term mindset, few realize how critical it is to enduring success in active management. Our research shows that the best active managers suffer extended periods of underperformance along the way to top-quartile and even top-decile results. For asset owners, it can be challenging to resist short-term instincts in volatile environments like the one we’ve seen in recent months. But those who have a strategy to help them stay focused on the long term may be best positioned to reap the benefits of outperformance and avoid 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
Recently, 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 (339 managers, 2013 – 2022). We evaluated their peer-universe-relative 10-year excess return rank (calculated using the MSCI All-Country World Index) to identify the best performers — those in the top quartile or top decile over the full decade.
As shown in the dark-blue bars in Figure 1, every one of these top-quartile managers experienced not just a “bad year,” but a 24-month period during which they lagged the median manager in the universe. Almost all (86%) did the same over a rolling three-year period and more than half (52%) were below median over a rolling five-year period — half of the time period we studied!
We also looked at how much of the time these top-quartile managers spent among the bottom-quartile of their peers (light-blue bars). Amazingly, 89% of the top-quartile managers spent at least a year in the bottom quartile, and more than 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.