INVESTMENT

Active Success: Investment Lessons from Odysseus


At the end of the Trojan War, Odysseus embarks on a journey back to his family, his possessions, and his kingdom on the Greek island of Ithaca. The journey will take 10 days. Instead, it took 10 years.

Odysseus faces an unexpected challenge at his voyage home. She is captured by a goddess. He fights Cyclops. He went through a terrible storm. And when he wrestles with this test, his rivals in Ithaca consume his wealth and compete for his wife’s affection.

Towards the end of the decade, when Odysseus finally reaches Ithaca, he defeats his wife’s relatives and secures his wealth and inheritance.

My idea of ​​Homer’s epic? Odysseus would have been a great investor.

Why? Because patience is a quality of investment. And even when we invest with an extraordinary performance manager, this quality is essential. The conclusion of our research is what kind of gut strength is needed to cope with the ups and downs that come with actively managed strategies.

Definition of patience and drawdown

We define patience in three dimensions:

  • Incidence and frequency probability: Has the fund experienced substandard experience? How many times did these times of relative inferiority occur?
  • Dimensions: What was the worst relative performance between different periods? Which fund has experienced a particular level of decline?
  • Duration: What was the longest period of relatively low performance measured by the length of time between the top of a fund and the subsequent return to that peak?

Ience is the result of historical patience

So what does a patient investor have to endure in a well-functioning equity fund and what will they get in return?

To help answer this question, we analyzed US-residential actively managed mutual funds with returns of at least 10 years in the 25 years ending 31 December 2019. The sample included 2,593 funds of which 1,173 exceeded their style benchmark Medium Outperforming Fund about 1% annual net additional return.

Overall, we’ve determined that almost all good managers often have lower performance than their own style or peer standards. Some of these low quality periods are large and long term.

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We have found that almost 100% of outperforming funds have experienced a drawdown compared to their style and middle peer benchmarks during one, three, and five year evaluations. What’s more, per0% outperforming fund There was at least a five-year period When they were in the lower quarters compared to their peers. This is especially important for senior executives to understand the results of the 2016 State Street Survey, including the responsibility for asset allocation for large institutional investors. The survey found that 89% of executives would not tolerate vulnerability for more than two years before seeking a replacement.

In addition, some investors lose patience if a manager does less than a certain amount. We found that more than half the performance of active equity funds has pushed their style and middle peer benchmarks by 20% or more.


The draw-down of most outforming funds was worse than -20%

Comment; We assessed all U.S.-resident, nine-style-box U.S. active equities, emerging markets and developed overseas funds with 10 years of performance data for the period from 1 January 1995 to 31 December 2019. Style benchmarks, and identifying all net outperforming funds. We compared their style benchmarks, median peers, and 25-percentile peers to calculate the level of each downside of each fund during the sampling period and used the worst downside of each outlying fund. We gradually define the level of a drawdown as a pick-to-truff loss in a portfolio value compared to a criterion that occurred during the drawdown period.

Source: Vanguard calculations based on Morningstar, Inc.


After all, among the funds rescued from their biggest draws, three-quarters did so after three or more years of underperforming. A quarter of a year that has recovered after more than seven years of repression.


Three-quarters of the outperforming fund recovery time was more than three years

Note: We have assessed all US residents nine Style-Box US Active Equity, EM and developed non-US funds with a minimum of 10 years performance data from 1995 to 2019 compared to their style benchmark and identified all net outperforming funds. We calculated the length and dimensions of each drawdown of each fund during the sample period for 1,173 funds that exceeded their style criteria and identified the largest drawdown by measurement. From that sample, we identified 478 funds that recovered from most drones. We define the dropdown period as the length of time that a portfolio decreases in value compared to a benchmark and is measured from a peak until the value returns to the top level where the fall began.

Source: Vanguard calculations based on Morningstar, Inc.


Investors who understand what to expect and high conviction and appropriate risk tolerance are more likely to have the patience they need. They will have the ability to prepare and tolerate dropdown frequencies, dimensions and lengths.

Odysseus also struggled with anxiety and passion to respond to short-term needs. When he set sail for Ithaca, the tempting song of the siren tempted him to deviate from his path and try to seduce him towards the destruction of the ship. But he was ready: his staff tied his ears with wax and tied his head so that he would not be ordered to leave or his instructions would not be obeyed when the siren sounded. So no matter how fascinated he was and attracted to Siren’s songs, he could not change his ways. Odysseus acknowledged that impatience and panic would bring disaster for him and his people.

His response is a powerful lesson for investors who want to move forward with proactive strategies.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Photo Credit: © Getty Images / ZU_09

Chris Tedmore, CPA, CFA

Chris Tedmore, CPA, CFA, is a Senior Investment Strategist at the Vanguard Investment Strategy Group, where he leads the team that conducts research and leads thinking on issues related to active management. Prior to joining Vanguard in 2015, Tedmore ran the Geneva Arbitrage Fund, which focused on event-driven investment strategies. Prior to launching the Geneva Arbitrage Fund, he worked as an arbitrator businessman and portfolio manager for a large family office. In addition, he was an alternative trader on the American Stock Exchange and before working in the securities industry he was employed as an auditor, providing audit, accounting and advisory services. Tedmore has developed and taught courses in financial accounting, financial statements analysis, asset valuation, equity derivatives, trading, portfolio management, alternative investing, and CFA and CPA review courses. He earned a BS in accounting at the University of Delaware. He is a CFA Charterholder, CPA and past president of the CFA Society of Philadelphia.



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