NOTE FROM MJ - OK, I know I said no more blogs that relate in any way to my dating life, but some comments on my last blog about performance reminded me of this not-so-quaint interlude. I am now officially out of dating mishaps, so read on about the importance of evaluating performance data and rest assured you won't have to read anything more about my love life for a long, long time.
Merriam-Webster defines a spinster as “an unmarried woman and especially one past the common age for marrying.” Tennessee women tend to get married at 26.1 years old, so given that I’m now into my 20th year in the investment industry and my middle name ain't Doogie Howser, I think it’s pretty safe to say I’m a spinster, and have been for some time.
From time to time, that fact has weighed on my mind, leading me to pursue any number of methods for exiting singlehood. But my best (read: worst) move had to be when I decided to offer my friends a bounty for fixing me up.
That’s right, I straight up bribed my friends to find me dates. I offered $100 bucks to any friend that set me up with a guy that I found appealing enough for a second date. Sure, it wasn’t a princely sum, but in Nashville $100 bucks goes a long way.
And the dates started rolling in. There was the guy who was afraid of shrimp. And a man who, for some reason, felt that racial slurs were polite conversation. There was this one gentleman whose hands were so diminutive that he unironically ate baby corn like Tom Hanks in “Big.”
After a string of truly horrible outings, I started to press one of my more prolific booty bounty hunters for more details before agreeing to meet another guy. Her response: “He’s single, you’re single. You’re both interesting. What else is there to know?”
I ended this particular incentive program shortly thereafter. It seems that many in my circle felt similarly – if a man met the most basic criteria (XY and breathing) and could be described in any way as “interesting” it was a match.
Weirdly enough, during a recent discussion on fund performance, I had a flashback to the days of my dating stimulus plan. It seems that there is a (growing?) school of thought in Investmentlandia that past performance doesn’t matter, that the qualitative always trumps the quantitative, and that an “interesting” strategy should be enough to generate investor demand. One person recently commented on another blog: “Performance is 90% meaningless anyway…” And, just this May, Morningstar reported investors yanked $99 billion from actively managed funds that beat their benchmarks over the 12-month period ending January 31, 2017. What the…?
Perhaps this attitude springs from relentless benchmarking and active management “performance shaming” in recent years. After all, no one envies a CIO when they tell their board that their endowment, foundation or pension portfolio underperformed the S&P 500, and no one wants to be the fund manager in that slide deck that didn’t deliver. But rather than broad-brush damning of performance data, perhaps it makes sense to put it in perspective.
By the time you’ve spent any time in the investment industry, you’ve had the following phrase beaten into your noggin: “Past performance is not necessarily indicative of future results.” And to be sure, that’s not an incorrect assessment. However, past performance is also not wholly insignificant either.
At the end of the day, an investment strategy can sound wonderfully interesting, but it also has to generate returns. Past performance is one of the few ways an investor can tell if a particular investment strategy has, at least at one time, worked. Maybe the strategy hasn’t seen a full market cycle, and certainly extremely short or limited track records can be statistically insignificant, but I believe most investors still want to know that an allocation has a chance of success prior to making an investment. I mean, it ain't the thought that counts when it comes to investing, it's the returns, right? Otherwise wouldn’t first time funds and seed capital opportunities be much more popular?
And while it’s true that investors can’t bank on return data alone, past performance can provide some significant quantitative clues into potential qualitative issues. See a fund that is way out of step with peers? Could be skill, could be deception. There’s a fund that avoided or mitigated drawdowns against his or her benchmark! What can you learn from those periods about how the fund manager approaches investing, markets and risk? Run across some ridiculously smooth returns? How is the fund manager marking the book and have they ever been called Bernie? Have you ever graphed performance versus assets under management for a fund and firm? That simple exercise can yield questions about capacity and organizational infrastructure.
Of course, these are all fund-level performance questions, but there are a host of allocation-level considerations as well. For example, Vanguard examined the performance of flexible allocation funds from January 1977 through December 2016 and found that in the three most recent bull market periods, between 30.96% and 36.33% of the active managers outperformed a 60/40 portfolio. In the two bear market periods, however, those percentages jumped to 45.50% and 65.70%. And oft-maligned hedge funds? They’ve been underperforming lately, but lost just 18% in 2008, compared with 34% for the DJIA and 38% for the S&P 500. If we don’t take that past performance into consideration, what effective asset allocation decisions can we make to position a portfolio for future volatility?
Look, I’m not saying the data is the only thing, but I am saying it is something. Given enough data points, I could have potentially avoided having dinner with a crustacean-phobe, “Squirrel Paws” and a member of the KKK. If that’s not a worthy goal, then consider the money my matchmaking friends left on the table by ignoring relevant data. And at the end of the day, no investor – either in my love life or institutional - should want to do that.