Knowing when and why to fire an under-performing money manager is not always as easy as it seems. Most money managers and mutual funds either focus on specific types of securities or follow a particular investing style. Different classes of securities and investing styles tend to perform in different ways - sometimes following exact opposite patterns of performance. If you don't take the manager's specialization into account, you could wind up making the classic investment mistake of buying high and selling low.
Consider Mr. & Mrs. B, who had $20 million being managed by five different money managers, two of whom were losing money "big time." Not surprisingly, Mr. & Mrs. B were looking to replace these two managers. However, they had not looked at the managers' performance in light of their respective investment styles. Once they did, it was apparent that one of the under-performing managers was actually an outstanding manager for their value investment style. Unfortunately, value investing in general had not performed well recently. Mr. & Mrs. B realized that past performance of one asset class or investment style is not a good indicator of future performance. They concluded that they first needed to decide upon a proper asset allocation strategy - selecting the proper mix of asset classes and investment manager styles for their situation. Once they concluded that a value manager was an important part of their long-term asset allocation mix, it was clear their current value manager was a very good choice. That same analysis showed them that a third manager, who appeared to have performed well recently, was actually quite weak when compared with other managers of the same style.
Mr. & Mrs. B did replace two of their managers; but, after their asset allocation decision and manager style analysis, the managers replaced were not the ones they originally had planned to replace. They recognized that, while the managers' short-term performance might be a little less, their portfolio's long-term performance would most likely be both higher and less risky.
Updated: January 1, 2013
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© 2013 Wilmington Trust Corporation.