Chasing Top Fund Managers | Summary and Q&A

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February 27, 2021
by
Ben Felix
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Chasing Top Fund Managers

TL;DR

High-performing funds with star fund managers often attract investors, but their success is usually short-lived and can result in poor long-term returns.

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Key Insights

  • 🍉 Funds with high short-term returns often lead to poor long-term performance due to factors such as overpriced stocks and mean reversion.
  • 🍉 Extreme short-term fund returns from companies with high prices often result in bad long-term outcomes compared to smaller and lower-priced stocks.
  • 🎭 The best-performing funds are more likely to become the worst performing funds over time, either due to unskilled managers reverting to the mean or skilled managers seeing their funds grow too large.
  • 🥺 Investors tend to chase performance, hiring fund managers based on past returns, which often leads to disappointment.

Transcript

from time to time seemingly brilliant fund managers emerge professing to have the unique wisdom and knowledge required to successfully invest in a rapidly changing world they prove their apparent clairvoyance with astronomical returns which in turn result in their fund having explosive growth as new investors rush in to benefit from the manager's i... Read More

Questions & Answers

Q: Why do high-performing funds led by star managers often result in poor long-term returns?

One reason is that the fund's short-term success is often driven by investments in companies with high prices relative to their business fundamentals, resulting in lower expected returns. Additionally, lucky but unskilled managers revert to the mean, while skilled managers struggle as their funds grow in size.

Q: Do investors tend to chase performance when selecting fund managers?

Yes, studies show that investors often hire fund managers after they have produced large positive returns, only to find that these managers fail to continue delivering such performance. This behavior of chasing performance is common in the investment industry.

Q: Are there any examples of funds with high short-term returns followed by poor long-term performance?

Yes, examples include the fidelity capital fund led by Gerald Tsai Jr., the Manhattan fund managed by Fred Carr, and Garret Von Wagoner's emerging growth fund. These funds experienced significant success initially but eventually suffered from poor long-term returns.

Q: How can investors avoid falling into the trap of investing in high-performing funds that turn out to be poor investments?

Instead of chasing performance, investors should focus on paying a reasonable price for companies with good prospects. Investing in a diversified portfolio and considering factors such as valuation and long-term potential can help investors avoid the pitfalls of high-performing funds.

Summary & Key Takeaways

  • High-performing funds led by star fund managers tend to attract investors seeking astronomical returns.

  • However, the short-term success of these funds is often followed by poor long-term performance.

  • Examples such as the fidelity capital fund, Manhattan fund, and Garret Von Wagoner's emerging growth fund highlight the pitfalls of investing in high-performing funds.

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