Investing for the long run can, at times, test anyone's patience. The way we respond to this test of patience may very well determine the long-term success or failure of any investment program.

Sticking with a money manager in the midst of a tough stretch may ultimately produce one of two results:

• The numbers eventually turn around and the money manager comes through with stellar long-term performance. The advisor preaching patience is dubbed as visionary, disciplined and thoughtful. Clients are happy and all is well.

Or,

• The tough stretch turns into a long and painful, seemingly bottomless decline. Advisors allowing their clients to go down this slippery slope are judged as complacent, stubborn or simply naïve. General dissatisfaction mounts.

Based on a study conducted by Litman/Gregory’s “Advisors’ Intelligence”, an independent, mutual fund research firm based in California, our patience is tested a lot.

The research firm’s study was designed to answer two basic questions:

• How many money managers with proven superior long-term (10 years) results have had short-term (3 years) periods of underperfomance?

• How significant was the underperformance?

The study covers the last 10 calendar years period. We believe this period to be appropriate for such a study, as it includes the times that led to the late ‘90s stock market bubble, the bubble itself, and the bubble’s ultimate undoing. In other words, the period has spanned over an entire business cycle and it has not unjustly favored any particular investment style or discipline over another.

Why look for periods of three years of underperformance? - Based on our industry’s experience, a three-year period is generally long enough to test the goodwill, resolution and trust of even the most dedicated, loyal and patient of investors.

Here is what we learned from the Litman/Gregory study (see chart for details):

• Only approximately 15% of all large cap actively managed mutual funds have outperformed their benchmark over the last 10 years

• An overwhelming 90% of these few long-term leaders have had periods lasting at least three years, in which they trailed their benchmark by at least 2% (annually)

• A 70% majority of the long-term leaders had three-year periods of under-performance in which they trailed their benchmark by at least 5% (annually)

The conclusion is straightforward : even a three-year long stretch of underperformance offers no indication whatsoever that a particular money manager should be replaced. We now know that over 90% of this decade’s winners have had significant enough periods of underperformance lasting at least three-years.

Past performance is not indicative of future returns

• What then, can we rely upon when making our investment decisions?
• How can we tell tomorrow’s long-term winners apart from the losers?

The future investment success of money managers will not merely be caused by past successes. Rather, future success is a function of the motivation, talent, determination, operational discipline and continuous hard work that goes on behind the scenes within each organization.

At Fragasso Financial Advisors, we believe that long-term successful money managers share many common traits:

• A willingness to own unpopular investments and go against the grain
• The discipline to ignore sometimes painful shorter-term swings
• A corporate culture based on stewardship of shareholder interests
• Transparency of process and communication

Our task is to identify, monitor and make sense of these traits on your behalf. As we are driven by our clients’ long- term financial goals we seek to employ money managers that are most likely to deliver the desired long-term results, consistent with your investment goals.

This article is for informational purposes only and not intended as financial advice. Consult your financial advisor to determine what is appropriate for your situation.
Past performance is no guarantee of future results.

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