The best route for most investors is to exercise patience. With a well-researched, well-diversified portfolio, investors should be able to weather a period of underperformance, use these investment performance cycles to their advantage, and avoid the kind of behavior that can undermine long-term investment results.
MILWAUKEE (PRWEB) July 28, 2008
Baird studied more than 1,334 mutual funds with a 10-year performance record through Dec. 31, 2007, and found 38%, or 505 funds, were high performers, meaning they had outperformed their benchmark by 1% annually over the 10-year period. Eighty-one percent of these high performing managers had experienced at least one three-year period of benchmark underperformance of 1% or more. Fifty-six percent had experienced benchmark underperformance of 3% or more and 31% had underperformed by 5% or more over a three-year period. It is important to note that despite these periods of underperformance, these high performing managers all were successful over the full 10-year period.
Said Tim Byrne, Managing Director and Director of Baird's Private Wealth Management Research, Products and Services. "The implication for investors is not to give up on managers just because they hit a period of underperformance. The study reinforces a well-accepted concept about the cycles of investment performance. But our study goes a step further to provide concrete examples of what this has meant for investors and what they should do about it. Investors who buy or sell relying only on recent performance will invariably buy or sell at the wrong time."
The study illustrates investor reaction to underperformance and its implications by quantifying just how many investors buy high and sell low. Using Morningstar star rating data, Baird tracked inflows into funds that had been upgraded (from 4 up to 5 stars) and compared it to funds that had been downgraded (from 3 down to 2 stars). The upgraded funds saw $71 million in net inflows in the subsequent 12 months while the downgraded funds saw fund outflows of $17 million. Yet the upgraded funds posted outperformance of 2.5% annualized for the three years following the upgrade. However, the downgraded funds average annualized outperformance was higher at 3.8%.
Said Byrne, "The best route for most investors is to exercise patience. With a well-researched, well-diversified portfolio, investors should be able to weather a period of underperformance, use these investment performance cycles to their advantage, and avoid the kind of behavior that can undermine long-term investment results."
The full results of this study can be found at rwbaird.com/investorsparadox.
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has more than 2,300 associates serving the needs of individual, corporate, institutional and municipal clients. Baird oversees and manages client assets of $74 billion. Committed to being a great place to work, Baird is one of FORTUNE's "100 Best Companies to Work For" in 2008 – its fifth consecutive year on the list. Baird's principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird's private equity operations. For more information, please visit Baird's Web site at http://www.rwbaird.com.