Markets have a tendency to “over-emphasise temporary themes and short-term factors” according to ECP Asset Management chief executive Manny Pohl
In addition, investors run the risk of missing out on long-term benefits when changing their strategy based off short-term data, Mr Pohl said.
“Take 2016 for example. It was a very unusual year for growth style managers, with all the usual sources of risk in many portfolios experiencing negative payoff – stock selection, sector allocation, style and market beta all contributed negatively to active return. This type of positive correlation in any calendar year is highly unusual,” he said.
“But this kind of outcome is unlikely to be repeated, so making investment decisions today based on last year’s performance is not going to produce the expected – or desired – result.”
Staying true to label is then critical to a fund manager’s long-term success, Mr Pohl said, and investors should consider more than past performance when looking for a fund manager.
“There will be times when the best money managers in the world – as judged by various market metrics – nevertheless get absolutely battered in markets. So investors need to consider more than just past performance when choosing a manager,” he said.
“Equally, they need to consider more than past performance when making the decision to ditch a manager. Someone who invests in a fund manager because they are outperforming the market, but then ditches the manager when they underperform, will miss out on the upturn when the market conditions change and the manager is in a position to outperform again.”
Mr Pohl said investors should consider the underlying causes for short-term underperformance before making a decision on whether or not to enter or exit a fund.
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