Your mutual fund got clobbered in 2023. You’re wondering if your mutual fund manager is out of sync with the times. How long do you wait before you dump him/her?
Therein lies the problem with looking solely at last year’s results—they are so…last year.
To fix something that’s not working, you have to analyze not only WHAT happened, but WHY.
Here’s an example. I used to play football (a claim my former coaches might challenge).
Among my “athletic limitations” was the small matter of forgetting what to do during plays. In those moments (and they were many), I would just “do something.” I figured that was preferable to looking towards the sidelines and giving my coach the “What do I do now?” sign ¯\_(ツ)_/¯.
Every once in a while, my “doing something” resulted in a good play. But even then, the coach wasn’t happy, and he would let me know. Loudly. “Moore, if your brains was dynamite, you couldn’t make a hummingbird sneeze!” (I’m paraphrasing since this is a family newspaper.)
Coach understood two things: 1. Past success (especially when it’s accidental) is no guarantee of future success. 2. Past failure doesn’t (have to) guarantee future failure.
What counts most is the process—making the right preparations and engaging in all the right practices. Get the process right, and more times than not, the performance will be positive too.
Prizing the proper process, rather than punishing a past performance is a good rule for investors too.
One more example.
Toyota sales were terrible in 2011. Should the company have fired all its sales managers? If you only look at performance, it seems that way.
But zoom out and you’ll remember that an epic earthquake in Japan early that year caused a tsunami that flooded nuclear plants and forced factory shutdowns. How was Toyota supposed to sell cars it couldn’t make?
Okay. What about the safety managers at the 11 affected Japanese nuclear plants? Should they be terminated? Obviously, the earthquake wasn’t their fault. However, they were judged for the safety measures and emergency processes they did (or didn’t) have in place.
So, back to your mutual fund and mutual fund manager. There were likely multiple factors that led to the fund’s underperformance. Do you know what they were? Were they things the manager should have foreseen? Or were they situations and events beyond the manager’s control?
Before you dump your fund manager because of underperformance, you might want to measure his/her performance against other managers with the same investment profile. If your fund manager is focused on smaller companies with attractive growth prospects, how does his/her performance stack up when measured against fund managers using a similar investment process.
Does this mean you’ll have to dig deeper and do some homework? Yep.
Here’s the takeaway. To get a more accurate sense of what the future might hold, don’t evaluate past performance only. Look even harder at all the processes in place.
If you’re a business owner, this approach of prizing the proper process over punishing for past performance is good to keep top of mind. When evaluating key employees, you don’t only ask “what happened,” you also explore “why?”
And while we’re on this subject of process, what’s yours for turning your retirement assets into regular retirement income for the rest of your life. If you’re not sure, email me (email@example.com). It can help you figure out—based on your unique “financial personality” the best process for you.
Argent Advisors, Inc. is an SEC-registered investment adviser. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Please See Important Disclosure Information here.