Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 405

Dump the short-term churn for better long-term performance

The goal of equity fund investors should be to identify and stay with top-performing managers over the long term (5-10+ years). Data shows that virtually all long-term top-performing managers have shorter term periods (1-3 years) where they underperform their benchmark, but ditching managers at the first sign of underperformance is likely to be a suboptimal strategy. 

Too much focus on the short term

The financial media love to laud or lament short-term investment performance, both good and bad. As an investor, it’s easy to get drawn in and mentally extrapolate out recent trends across your portfolio.

But to capture superior long-term results, which is what most investors ultimately aim for, periods of short-term pain must be tolerated.

These short-term swings can be difficult to stomach and will often tempt investors to bail out of the market. However, without being able to accept periods of underperformance, investors may miss the market’s inevitable rebound and fail to harvest the long-term superior returns of equities.

If investors can develop a deeper understanding of how top funds perform over time, they will more confidently weather the inevitable periods of short-term volatility in performance, and be more likely to reach their long-term investment goals.

Don’t be alarmed

Almost every top-performing fund has instances where it underperforms its benchmark and its peers, particularly over time periods of three years or less.

A study by independent US investment bank, Baird, looked at a group of more than 1,500 funds with 10-year track records. They then narrowed the list to 600 funds that outperformed their respective benchmarks by one percentage point or more, on an annualised basis, over the 10-year period. The list was further narrowed to include only those funds that both outperformed and exhibited less volatility than the market benchmark.

Percentage of top-performing funds that underperformed over any three-year period 

Source: Morningstar, Baird Analysis

Despite their impressive long-term performance, 85% of these top managers had at least one three-year period in which they underperformed their benchmark by 1% or more. About half of them lagged their benchmarks by 3%, and one-quarter of them fell 5% or more below the benchmark for at least one three-year period.

Investors could have been alarmed by these periods of underperformance, yet in the long-run, it paid off to stay with the top performers over a 10-year time span.

It pays to be patient

When looking at shorter periods, the results were even more telling. All the top managers dropped below their benchmark at least once. Moreover, one-quarter of them went through at least one 12-month period where they underperformed their benchmark by 15% or more.

Percentage of top-performing funds that underperformed over any 12-month period

Source: Morningstar, Baird Analysis

By these measures, all fund managers, including even the best, go through periods of underperformance. It is challenging to know what to do when a fund is in the midst of one of these tough periods but it pays to be patient. The longer an investor can wait, the better their funds' chances of beating its benchmark become.

Time diversification

One of the major factors affecting fund performance is the cyclical relationship between asset prices and the business cycle. In the short term, investments can fluctuate in value for a number of reasons, including changes in the economy, volatility, political uncertainty, business failures, interest rate changes, fluctuations in currency values, and company earnings. In an economic downturn, GDP growth slows, and business earnings decline, which leads to less optimistic outlooks for companies and lower stock prices. In an economic expansion, the reverse tends to happen.

But time is an investor’s best ally.

As investor holding periods lengthen, short-term risks tend to become less relevant, partly because many short-term price movements tend to offset each other over a complete business cycle. This means that, as an investment's holding period increases (such as 20 years versus five years), investment risk due to market volatility (ups and downs of prices) will decrease. Both the frequency and magnitude of underperformance become less dramatic over more extended periods.

Register here to receive the Firstlinks weekly newsletter for free

Take an holistic view and reduce the churn

In our opinion, fund manager churn benefits no one, and hence at Ophir, we seek investors who agree with our investment philosophy and appreciate our process. We expect our portfolios to have negative years or underperform their benchmarks on occasions, and we understand that investors may feel uncomfortable through these periods. We prefer not to see investors buy into an Ophir equity fund based solely on a few quarters of strong returns if they are likely to reverse course and sell out when returns fall short.

For example, as seen below, the Ophir Opportunities Fund, which has the longest track record of any Ophir fund at almost nine years, has had two periods of one-year underperformance and one period of three-year underperformance (albeit briefly), yet is the top performer in its class* over the long term, generating 24.6% p.a. (net of fees) since its inception in August 2012.

Source: Ophir Asset Management. *FE fund data, Australian Small/Mid Caps, Aug 2012 to March 2021

Investors should remain focused on their long-term financial plan and avoid knee-jerk reactions during times of negative absolute or relative performance. A more holistic view of managers needs to be taken. This includes factors such as long-term track record (if it exists), people, investment process, levels of alignment and adherence to capacity constraints, amongst others. 


Andrew Mitchell is Director and Senior Portfolio Manager at Ophir Asset Management, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

Read more articles and papers from Ophir here.


Mark Schwartz
May 02, 2021

I have recently sold almost all my managed investments after doing a little fees vs investment return analysis and realising the brutal truth. My guess is that most long fund managers, while having available to them all the sophisticated tools they require, are so short term focused because they need to actively market their product, they will more or less hug the index to at least ensure they are not unattractive to new investors. If they don't pick a small number, at least, of star performers and spice up their returns, they will underperform.
Almost any competent investor, with a little effort and oversight, can construct a reasonably performing portfolio. The only question is whether they really want to.
In the end, these organisations exist to provide profits for their own stakeholders and that is fair enough. If you want to play their game, I suggest the best filter for long term consistent performance is simply how much of their own skin do they have in the game. That is not an easy thing to find, however, but if you can, you are likely to be backing a good horse. Yes, successful investment is a real art.

April 29, 2021

Interesting dissertation, but Baird narrowed it down to the best performing managers, then looked backwards to find at some points they underperformed. Trouble is one wouldn't have known who these managers are at the start of the ten years. One could have invested with, and stayed with, the worst performing managers over ten years. The challenge is deciding, without the benefit of hindsight, when a performing manager becomes a non-performing manager (or vice-versa) and acting accordingly. I would suggest that neither investors not advisers don't have a great track record in this regard.

Warren Bird
April 29, 2021

I don't think you can jump to that conclusion on the basis of the information in the article. In doing so you've inserted quite a few assumptions or other data points that you'd need to draw upon.

Mind you, I don't think Andrew has shared enough information to establish the conclusion that he comes to either!

However, Andrew gives us a clue about what we'd need to look for. He believes that a consistent, buy and hold (with exit disciplines) process will result in a manager being among the top performers. He needs to do more digging into the data and see if the top performers all did have such processes, which would provide more solid support for his thesis.

But cynics like you Graeme need to be able to demonstrate that the link between process and performance was more random than that. You've assumed that in your comment, but it might be wide of the mark. Only if there's no link between process and performance can you dismiss Andrew's analysis completely.

May 01, 2021

Warren I don't think Graeme is cynical. He is simply recognising that the odds of being able to pick an outperforming manager ahead of time and then having the gumption to stick with them through inevitable periods of underperformance, are very slim. Empirical evidence shows that 80-90% of managers underperform their benchmark net of costs over the long-term (10+ years). Even institutional investors (who are mean to be the smart end of town) have been shown to sell after 3 years of sub-par performance. What are the changes a more uninformed retail investor will stay the course? Those odds should be enough to walk away but, alas, many investors/advisers suffer from the overconfidence bias and figure they have an informational edge. Most likely they are basing their decision on past performance, even if they profess to screen only on process. Which means the manager they invest in has a higher probabiliy of mean reversion than continued outperformance. Not saying investors should eschew active entirely but best to be used sparingly and not in any market that is reasonably efficient.

Jeff Oughton
May 02, 2021

thanks - that makes sense v SPIVA studies

Jeff Oughton
April 29, 2021

Your point is well made but..

How many of these 600 funds in this US study of 1500 equity funds outperformed after taking account of the price volatility/risk? And did it take account of fees/costs?

The S&P SPIVA studies find a lot less active equity managers of US, Australian and global equity funds out perform over the short run and long run.

April 29, 2021

Yes, I was also wondering about that. The chart seems to show far more fund managers outperform their index over 10 years than the SPIVA data shows.


Leave a Comment:



Buffett's favourite indicator versus all-in equities

To your taste: hot cross buns and hot, cross funds

Unfortunately, all fund manager presentations are good


Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates


Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.


How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.


Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.