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.
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%
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
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.
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