The Deception of Short Term Performance| “A person must be an optimist to be in this business, but I also believe it’s a cyclical phenomenon for several other reasons. In our 18 years of experience, we’ve had to endure a number of long and nasty periods during which we’ve asked ourselves this same question. In late 1981, our accounts had lost about 42 percent over the previous 12 months, and we and our clients were starting to wonder if we would ever see good markets again. We continued to trade our thoroughly researched system, but our largest client got cold feet and withdrew about 70 percent of our total equity under management. You guessed it. Our next month was up 18 percent, and in the 36 months following, their withdrawal of our accounts made 430 percent![i]
[pullquote] 93% of top quartile performing large cap money managers spent at least one three year period in the bottom half of the group; 62% spent at least one three year period in the bottom quartile and 31% spent at least one three year period in the bottom decile. [/pullquote]
An Australian study done in 2008, surveyed the best performing 112 large cap funds with a ten year track record. The study focused on funds that were in the top quartile for that ten year period. The study covered funds from 1998 to 2007, and found some shocking results. Of the top 10 managers:
90% of these top managers’ rankings fell to the bottom half over this period for at least one year, whilst 40% of these top rated managers rankings fell into the bottom quartile over this period for at least one year.[ii]
A more recent study done in 2011 looked at the top performing large cap managers from January 1, 2001 to December 31, 2010. The results were even more shocking. The study was done by the Davis Advisors. The study found that
93% of top quartile performing large cap money managers spent at least one three year period in the bottom half of the group; 62% spent at least one three year period in the bottom quartile and 31% spent at least one three year period in the bottom decile. Though each of the managers in the study delivered excellent long term returns, they almost all suffered through a difficult period.[iii]
Two different studies found the exact same thing. The commonalities between them are too obvious to ignore. I found at least one other study that found the same thing. These white papers tell us that funds should be looked at as a long term commitments.
Even with this convincing information, why would fund of funds, investors and institutional investors pull out a record 40 billion from hedge funds in October of 2008?
The answer is really simple; investors are chasing short term performance numbers. One doesn’t have to look further than the best performing mutual fund of the last decade which would be Ken Heebner’s CGM Focus Fund. The fund returned an annualized 18% for the last decade but investors in the fund had an annualized return of -13.37%. Wait that doesn’t make any sense! Oh but wait, it does! It makes perfect sense if investors are chasing short term performance! One can see that in 2008 the fund had a bad year, so investors most likely pulled out their money and hopped back in 2009 after the fund had a better year.
Performance of CGM Focus Fund
Fund managers need to start doing extensive due diligence on their investors and start educating their investors on how their fund’s work. Fund managers also need to stress the importance of the fund’s long term views to investors so they will understand that there will be bumps in the road.
[i] Covel, M. W. (2009). Trend Following: Learn to Make Millions in Up or Down Markets. In M. W. Covel. Pearson Education Ltd.
[ii] Thomas, B. (2011). The Wisdom of Great the Investor. Perennial Investment Partners Limited.
[iii] (2011). The Successful Investor. Davis Funds.
[iv] (n.d.). Retrieved 7 ,17, 2012, from GuruFocus: ttp://www.gurufocus.com/ListGuru.php?GuruName=Ken+Heebner