Baird study recommends investors be patient
Even the best investment managers underperform. That’s the conclusion of a recent study by Baird Advisory Services Research. Baird studied more than 1,334 mutual funds with a 10-year performance record through Dec. 31, 2007, and found that 38 percent, or 505 funds, were high performers, meaning they had outperformed their benchmark by 1 percent annually over the 10-year period.
Eighty-one percent of the high-performing managers had experienced at least one three-year period of benchmark underperformance of 1 percent or more. Fifty-six percent had experienced benchmark underperformance of 3 percent or more and 31 percent had underperformed by 5 percent or more over a three-year period. It is important to note that despite these periods of underperformance, the high-performing managers all were successful over the full 10-year period, Baird said.
Tim Byrne, managing director and director of Baird’s private wealth management research, products and services, said, "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."
Byrne added, "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 www.rwbaird.com/investorsparadox.