I subscribe to the S&P Indexology blog. Like most S&P communications efforts, I find this blog interesting, useful and reliable.
Anyway, two days ago Indexology published a check on the performance of equity managers who offer products to US customers.
In one respect, the findings were unsurprising. For managers with US stock portfolio mandates, well over half underperformed their benchmarks over the one-year period ending in June. Over five years, more than three-quarters failed to match or exceed the return of their index.
This is business as usual. Why this is so isn’t 100% clear to me.
One of my mentors used to say that ” the pain of underperformance lasts long after the glow of outperformance has faded.” I think that’s right. In other words, clients will punish a PM severely for underperformance, but reward him/her by a much smaller amount for outperformance. In a world where risks and rewards aren’t symmetrical, it’s probably better not to take the buck-the-crowd positions necessary to outperform. Instead, it’s better to accept mild underperformance, keep close to the pack of rival managers and spend a lot of time marketing your like-me/trust-me attributes.
(To be clear, this isn’t a strategy I wholeheartedly embraced. I generally achieved significant outperformance in up markets, endeavored not to lose my shirt in down markets. My long-term US results were a lot better than the index, but at the cost of short-term volatility that was greater than the market’s. Pension consultants, heavily reliant on academic theories of finance, tended to demand a smoother ride, even if that meant consistently less money in the pockets of their clients. Yes, a constant problem for me. But it illustrates the systematic pressure put on managers to conform, to look like everyone else.)
The surprising news in the blog post comes in international markets. Generally speaking, the markets overseas are simpler in structure, information flows much more slowly than in the US, and PMs tend to be ill-trained and poorly paid. Rather than being the culmination of a long a successful career, being a PM abroad is often only an early stepstone to something better. So pencil in outperformance.
On a one-year view, however, Indexology reports that the vast majority of managers of global, international and emerging markets portfolios all underperformed their benchmarks. This is the first time this has happened since S&P has been checking!!
I don’t watch this arena closely enough to have a worthwhile opinion on how this happened. The fact of underperformance itself is surprising–the fact that more than 75% of managers of international funds underperformed is stunning. My guess is that no one saw the deceleration of Continential European economies coming.
For anyone with international equity exposure, which is probably just about everyone, current manager performance is well worth monitoring closely.