“I’d like you to underperform your benchmark by a consistent 200 basis points for the next six months.”
Imagine making this statement at your next fund manager meeting. It’s likely that those sitting across the table would look at you quizzically and ask you to repeat the instruction.
You’d say again—stressing this time—that you’d like your manager to underperform their benchmark by 200 basis points for the next six months. After all, if they are as skilful as they (and their fees) would have you believe, this should be no problem.
It’s probable that your manager would start reeling off the quarters of outperformance they’ve had and assure you that these returns are a better indicator of skill.
“OK, great,” you would counter. “Can I accompany you to your next training session? When this week are you analysing your performance? Who is responsible for pouring over your daily trade data and who poses the tough questions on your selling discipline?”
Cue more quizzical looks.
“Because,” you would then say, “if your returns are down to skill rather than luck, I want the best coaching team available—like Serena Williams, Lewis Hamilton, or the New York Yankees employ. We can’t afford for you to lose your edge.”
At this point, very few fund managers would throw open their office door and lead you to the nerve centre where all this happens. Most of them would smile nervously and ask if you’d like to hit the bar or have a round of golf instead.
Egos and mediocrity are the problem. If your fund manager maintains you are remunerating him for his superior skill, but refuses to take advice or training to maintain or improve his performance, he might find that luck soon runs out.
And do you want your assets to crash out of the major leagues with him?
More here – Chief Investment Officer