Not all periods of underperformance are created equal.

No investment process, no matter how robust, works in all environments and at all times. Most fund managers eventually have their day in the sun. Until they don’t.

Consider where some of today’s top-performing funds ranked just a few years ago. Many sat near the bottom of the performance tables. Equally, some of the funds currently struggling were recently celebrated as industry leaders. Despite overwhelming evidence that performance persistence is elusive, investors continue to behave as though recent returns reveal a permanent truth.

The reality is that all high-conviction active managers experience prolonged periods of both outperformance and underperformance. If a fund is enjoying an unusually strong period of relative returns, leaner times will almost certainly follow.

Yet every time this cycle unfolds, we behave as though we have never seen it before.

At the heart of this behaviour lies outcome bias. We judge the quality of a process or the skill of a manager primarily by the results recently delivered. In a noisy system such as investing, this is a dangerous assumption.

Extrapolation compounds the problem. When a manager is outperforming, not only do we assume their ability is unquestionable, but we struggle to imagine a future in which those strong returns would come to an end.

The last thing most of us want to acknowledge is our own role in the disappointment. It is easier to blame the manager than to admit we underestimated the inherent cyclicality of investment returns.

Seldomly do investors admit to performance chasing. We prefer to believe our decisions are driven by careful analysis and sound reasoning. We can always construct persuasive narratives explaining why we selected a manager and why recent returns were merely incidental. We tell ourselves we value the process, not the outcome.

In the real world, our actions often tell a different story.

We are naturally inclined to see a good process behind good outcomes and a flawed process behind poor outcomes. As a result, investors are irresistibly drawn to funds at the top of the rankings and increasingly uncomfortable holding funds that appear to be struggling. Decades of evidence suggest this behaviour destroys value, yet it remains remarkably persistent.

The sad truth is that investors often end up earning returns that lag the very funds they invest in. They buy after periods of success and sell after periods of disappointment, effectively harvesting the opposite of what the managers themselves deliver.

It is as though we believe we are entitled not only to a manager’s recent performance, but to an endless replay of it.

What should investors do instead?

If you want to benefit from genuinely differentiated active management, three things are required:

1. Identify a manager with a credible source of skill or edge.
2. Be willing to endure periods, sometimes years, of underperformance while that edge goes through its natural cycle.
3. Develop the ability to distinguish between cyclical underperformance and genuine deterioration in the investment process.

None of these is easy.

The one form of consistency that is clearly observable is not manager performance but investor behaviour. The cycle of chasing winners and abandoning losers repeats with remarkable regularity. Even awareness of this tendency seems to be insufficient protection against it.

You need a framework of thinking that serves as a guardrail when the sirens start to sing.

Without deep conviction in your process, you will inevitably be pulled toward the latest performance narrative. Your attention will be captured by short-term outcomes rather than directed toward the long-term objectives that matter.

The uncomfortable reality is that investors are often guided more by the numbers on a factsheet than by the process that produced them. A manager’s investment philosophy, discipline, and edge can remain entirely intact, yet a few years of disappointing relative returns can transform them from a hero into a villain in the eyes of investors.

What changes is often not the process, but the environment in which that process operates. Every investment approach moves through favourable and unfavourable market cycles. We tend to judge managers not within the context of those cycles, but by the size of the most recent number on the factsheet.

The factsheet captures a moment in time outcome. It does not capture the patience, discipline, or conviction required to see a process through an entire cycle. As a result, investors frequently abandon managers when expected future returns may be improving and embrace them when much of the opportunity has already been realised.

The manager has not changed nearly as much as the narrative surrounding them. The numbers determine whether they are celebrated as a genius or condemned as a failure.

The goal is not to find a process that never disappoints. Such a process does not exist.

The goal is to commit to a process that gives you favourable odds of achieving your objectives over time, and then to protect that commitment when it becomes most difficult to do so.

The real question is not whether a fund has disappointed recently. The real question is whether the reasons you invested in the first place are still intact.

If the process remains sound, the disappointment may say more about our expectations than it does about the manager.

 

Written by Marius Kilian

 

Source

*“Please, Stop Chasing Fund Performance”, Joe Wiggans, behaviouralinvestment.com, 2 Jun 2026