Relative performance involves measuring investment results, not against an absolute standard, but against broad stock market indices, such as the Dow Jones Industrial Average or Standard & Poor's 500 Index, or against other investors' results.
Most institutional investors measure their success or failure in terms of relative performance.
Money managers motivated to outperform an index or a peer group of managers may lose sight of whether their investments are attractive or even sensible in an absolute sense.
Who is to blame for this short-term investment focus?
Is it the fault of managers who believe clients want good short-term performance regardless of the level of risk or the impossibility of the task?
Or is it the fault of clients who, in fact, do switch money managers with some frequency?
There is ample blame for both to share.
There are NO winners in the short-term, relative-performance derby.
Attempting to outperform the market in the short run is futile since near-term stock and bond price fluctuations are random and because an extraordinary amount of energy and talent is already being applied to that objective.
The effort only distracts a money manager from finding and acting on sound long-term opportunities as he or she channels resources into what is essentially an unwinnable game.
Institutional investors should strive to achieve good absolute returns.
Institutional investment process should focus on maximizing returns under reasonable risk constraints.
If more institutional investors strove to achieve good absolute rather than relative returns, the stock market would be less prone to overvaluation and market fads would less likely be carried to excess. Investments would only be made when they presented a compelling opportunity and not simply to keep up with the herd.
Most institutional investors measure their success or failure in terms of relative performance.
Money managers motivated to outperform an index or a peer group of managers may lose sight of whether their investments are attractive or even sensible in an absolute sense.
Who is to blame for this short-term investment focus?
Is it the fault of managers who believe clients want good short-term performance regardless of the level of risk or the impossibility of the task?
Or is it the fault of clients who, in fact, do switch money managers with some frequency?
There is ample blame for both to share.
There are NO winners in the short-term, relative-performance derby.
Attempting to outperform the market in the short run is futile since near-term stock and bond price fluctuations are random and because an extraordinary amount of energy and talent is already being applied to that objective.
The effort only distracts a money manager from finding and acting on sound long-term opportunities as he or she channels resources into what is essentially an unwinnable game.
- As a result, the clients experience mediocre performance.
- The overall economy is also deprived, as funds are allocated to short-term trading rather than long-term investments.
- Only brokers benefit from the high level of activity.
Institutional investors should strive to achieve good absolute returns.
Institutional investment process should focus on maximizing returns under reasonable risk constraints.
If more institutional investors strove to achieve good absolute rather than relative returns, the stock market would be less prone to overvaluation and market fads would less likely be carried to excess. Investments would only be made when they presented a compelling opportunity and not simply to keep up with the herd.
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