The Perils of Past Performance, Part 2

Patrick Rudden

Last month, I wrote that even great investors are very likely to underperform in one of the next three-years periods. Here’s some historical evidence that even champs can sometimes look like chumps.

I looked in a database of global equity managers to see who were the champs for the past decade. My definition of “champs” was managers in the top quartile of the global equity manager universe.

Next, I looked at how many of these champs stumbled along the way. To do this I somewhat arbitrarily but not randomly (an important distinction!) looked to see how many champs had a three-year period when they looked like chumps. I defined “chumps” as being in the bottom decile or quartile versus their peers over a three-year period.

As shown in the display below, more than one-third of the champs were in the bottom decile, and more than three-quarters were in the bottom quartile, for at least one three-year period in the past decade.

Even Champs Can Look Like Chumps

 

Clearly, the empirical evidence supports the statistical theory I offered last month. Most managers with long-term track records of winning are likely to have losing periods along the way—often quite lengthy ones.

As we argued in a prior research paper, simply relying on recent performance to judge a fund manager can be dangerous. Applying a qualitative assessment of a manager’s ability to outperform is likely to be more rewarding.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Patrick Rudden is Head of Blend Strategies at AllianceBernstein.

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