March 9, 2021
Don’t follow good short-term performance, follow long-term performance
Lonely man looking with hope

In our Investment Strategy Note we discuss how even the best long-term performing fund managers always have shorter term periods of underperformance – it’s not a bug, it’s a feature of the best.


  • The goal of equity fund investors is generally to be with the top performing managers over the long term (5-10+ years).
  • Data shows that virtually all long-term top performing managers have shorter term periods (1-3 years) where they underperform their benchmark.
  • Ditching long term top performing managers at the first sign of underperformance is likely to be a suboptimal strategy.
  • To be with long term top performing managers you should expect you will have to endure short term periods of underperformance.

The financial media love to laud or lament short-term investment performance, both good and bad. As an investor, it’s easy to get drawn in, as you mentally extrapolate out recent trends across your portfolio.

But to capture superior long-term results, which is what most of us ultimately aim for, we must tolerate periods of short-term pain.

These short-term swings can be difficult to stomach and will often tempt investors to bail out of the market. However, without being able to accept periods of underperformance, investors may miss out on the market’s inevitable rebound and fail to harvest the long-term superior returns of equities.

If investors can develop a deeper understanding of how top funds perform over time, they will more confidently weather the inevitable periods of short-term volatility in performance, and be more likely to reach their long-term investment goals.

Don’t be alarmed

The evidence is clear: virtually every top-performing fund has instances where it underperforms its benchmark and its peers, particularly over time periods of three years or less.

A study by independent US investment bank, Baird, looked at a group of more than 1,500 funds with 10-year track records. They then narrowed the list to 600 funds that outperformed their respective benchmarks by one percentage point or more, on an annualized basis, over the 10-year period. The list was further narrowed to include only those funds that both outperformed and exhibited less volatility than the market benchmark.

Percentage of high performing funds that underperformed their benchmark over any three-year period

Source: Morningstar, Baird Analysis

Despite their impressive long-term performance, 85% of these top managers had at least one three-year period in which they underperformed their benchmark by one percentage point or more. About half of them lagged their benchmarks by three percentage points, and one-quarter of them fell five or more percentage points below the benchmark for at least one three-year period.

Depending on which of the three-year periods investors looked at, they could have been highly alarmed by these periods of underperformance. Yet in the long-run investors profited: all these managers were top performers over the full 10-year time span.

It pays to be patient

When looking at shorter periods, the results were even more telling. All the top managers dropped below their benchmark at least once. Moreover, a quarter of them went through at least one 12-month period where they underperformed their benchmark by 15 percentage points or more.

Percentage of high performing funds that underperformed their benchmark over any 12-month period

Source: Morningstar, Baird Analysis

By these measures, it looks as though all fund managers, including even the best ones, will go through periods of underperformance. For investors, it can be particularly challenging knowing what to do when your fund is in the midst of one of these tough periods.

The evidence suggests that, rather than leaving a top-performing manager during difficult times, it pays to be patient through periods of underperformance. Indeed, the longer an investor can wait, the better their funds’ chances of beating its benchmark become.

Time diversification

One of the major factors affecting fund performance is the cyclical relationship between asset prices and the business cycle. In the short term, investments can fluctuate in value for a number of reasons, including changes in the economy, volatility, political uncertainty, business failures, interest rate changes, fluctuations in currency values, and company earnings. In an economic downturn, GDP growth slows, and business earnings decline, which leads to less optimistic outlooks for companies and lower stock prices. In an economic expansion, the reverse tends to happen.

But time is an investor’s best ally.

As holding periods lengthen, short-term factors like economic fluctuations tend to become less relevant, partly because many short-term price movements tend to offset each other over a complete business cycle. This means that, as an investment’s holding period increases (e.g. 20 years vs. 5 years), investment risk due to market volatility (i.e. ups and downs of prices) will decrease.  Because of this relationship, both the frequency and magnitude of underperformance become less dramatic over more extended periods.

Amply rewarded for patience

Investors who buy into an equity fund based solely on a few quarters of strong returns are quite likely to reverse course and sell out of the fund when returns fall short. In our opinion, this churn benefits no one, and hence at Ophir we seek investors who agree with our investment philosophy and appreciate our process. We expect our portfolios to have negative years or underperform their benchmarks on occasions and understand that investors can start feeling nervous and uncomfortable through these periods. As seen below, our Ophir Opportunities Fund, which has the longest track record of any Ophir fund at nearly 9 years, has had two periods of 1-year underperformance and one period of 3-year underperformance (albeit briefly), yet is ranked no.1* over the long term, generating 24.6% p.a. (net) since its inception in August 2012.

We strongly believe investors should remain focused on their long-term financial plan and avoid knee-jerk reactions during times of negative absolute or relative performance. All equity fund managers have short term periods of underperformance. A more wholistic view of managers needs to be taken. This includes factors such as long-term track record (if it exists), people, investment process, levels of alignment and adherence to capacity constraints, amongst others. In this way, investors who take a more wholistic view are more likely to set themselves up for long-term success.

Ophir Opportunities Fund – rolling 1 and 3 year outperformance (net)


Source: Ophir Asset Management. *FE fundinfo data, Australian Small/Mid Caps, Aug 2012-March 2021


Get our latest insights

By subscribing to Ophir News & Insights you'll understand more about our investment philosophy and process and the investment decisions we make on all of our behalf.

What You'll Get

  Monthly Ophir Letter to Investors
  Timely investment ideas
  Exclusive event invitations