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Investment industry should be goal-based rather than performance chasing
All surveys are created equal, but most performance surveys exist simply to capture factual information - the performance of investment managers over the same measurement periods - at a certain point in time.
Paul Wilson
The information contained within the performance survey is identical in the hands of various individuals. However, the relative importance of the survey to the individual and the interpretation of the information can vary greatly. This is true of both industry experts and investors.
In addition, factual information can also be misleading. It addresses the 'what' but not the 'how' of performance. Investment performance as reported in a survey is the result of a myriad of complex factors, including skill, luck, philosophy and fund manager biases. An investment manager may be very skilful, but due to his investment philosophy and biases, he may be performing worse than his peers.
On the surface, a person with little knowledge will only be able to see that this manager is performing worse than his peers at that specific point in time and might logically conclude that he's simply not that good. A good example of this will be deep value managers over the last three years, where value as a style has not been performing well.
Two conclusions
As a result, one should not expect these managers to top the performance surveys. If they were at the top, there could be only two logical conclusions:
Instead of examining one survey or even three years' worth of surveys, it is more worthwhile to research a fund manager thoroughly to get a better understanding of how the manager generates performance by asking the following questions:
While the first two points are not difficult to grasp and simply require 'time under the hood', the third question is more difficult to answer, especially for people whose job is not to identify skilful managers. One can understand how investors would then start to lean on surveys, believing that they can help them understand the skill of a manager.
Fear of missing out
Investors and advisers will suffer from a regret bias to one degree or another. This fear of regret creates a fear of missing out (FOMO) environment where investors will use surveys to question advisers on why they are not invested in the top-performing fund.
This propagates short-termism (excessive focus on short-term results at the expense of long-term results) and destruction of value. It has been well documented how we destroy value by chasing short-term performance, effectively buying high and selling low. Thus, in effect, the simple performance survey has provided a conduit through which people exercise their biases when making decisions.
Instead of chasing the top-performing fund (a moving goal-post), advisers should be assisting an investor to:
If the fund manager achieves the goals set by the investor, is there any need to change the investment manager or strategy? The adviser should definitely monitor the investment manager and test them appropriately on decisions, but if the goals are being met there is really no need to change.
Targets and objectives
This puts a far greater emphasis on ensuring that the correct targets and objectives are set. Hopefully, this will assist in eradicating short-termism and value destruction through changing asset managers and chasing performance.
In a world where people are more concerned about achieving their goals than chasing performance, performance surveys will have far less power than they currently do.
At the end of the day it is not the performance survey that creates all of these issues, but the people who reads too much into the survey and continue to propagate the cycle of value destruction. There needs to be a concerted effort through education by the investment industry around goal-based investing rather than performance chasing.
About Paul Wilson
Paul Wilson, portfolio manager and head of asset manager research at Sanlam Investments
