The MFWire
Manage Email Alerts | Sponsorships | About MFWire | Who We Are

Subscribe to MFWire.com's News Alerts [click]

Rating:Meet the Latest Fund Evaluation Complexities: LUP and LOP Not Rated 0.0 Email Routing List Email & Route  Print Print
Tuesday, March 27, 2018

Meet the Latest Fund Evaluation Complexities: LUP and LOP

News summary by MFWire's editors

Leave it to the team at Morningstar to throw another potential wrench into the way FAs and investors evaluate mutual funds, a wrench that raises complicated questions specifically around active management. Fundsters at actively managed mutual fund shops should consider learning (and perhaps loving?) two new acronyms: LUP (longest underperformance period in a given time period) and LOP (longest outperformance period).

Paul Kaplan, director of research at M* Canada, and Maciej Kowara, senior manager analyst at M*, authored the 20-page "How Long Can a Good Fund Underperform Its Benchmark?" report that introduces LUP and LOP and digs into them a bit, both through historical performance data and through simulations. M* veteran John Rekenthaler offers an article-length take on Kaplan and Kowara's ideas and findings.

The upshot of M*'s findings about LUP and LOP seems to be two-fold, even double-edged, for active asset managers. On the good news side, even funds that outperform over the long-term tend to have long periods of underperformance, too, meaning FAs and investors should cut them some slack when the going gets rough. On the bad news side, funds that underperform over the long-term tend to have long periods of outperformance, too, meaning that FAs and investors may pick long-term lemons that look like long-term gems. To tell the difference may take a lot more time than investors are likely to have.

"On the bright side, Paul [Kaplan] and Maciej [Kowara] did conclude that over a 100-year simulation, one could generally tell the difference between their managers who were programmed to be strong, and those who were programmed to be weak," Rekenthaler concludes. "I will leave the task to you, dear reader, to determine the disadvantages of investing with a 100-year time horizon. I believe that there are some."

For their historical research, the M* folks drew on gross performance data (i.e. fees stripped out) on 5,500 equity funds from the U.S., Canada, Europe, and Asia (not including Japan) from January 2003 through December 2017. They found that funds that outperformed for the full 15 year period still ended up underperforming for nine to 12 years in a row (on average) within that same time period. On the flip side, funds that underperformed for the full 15 year period still managed to outperform for 11 to 12 years in a row within that same time period.

"Hence, on average, investors who were hoping to hold outperforming funds over this 15-year period not only needed to pick the right funds but have the patience to endure periods of underperformance of nine to 11 years at some point within that period!" Kaplan and Kowara write, while also adding that "it would be a mistake to judge a fund's ability to outperform its benchmark on a track record as long as 11 years."

The researchers do caution that outperforming funds going through an LUP tend to underperform by small amounts (thus making outperformance over the long-term possible). So perhaps FAs and investors will use this research as justification to forgive funds that underperform by small amounts but not for ones that fall far behind for long periods of time. 

Edited by: Neil Anderson, Managing Editor

Stay ahead of the news ... Sign up for our email alerts now

 Do You Recommend This Story?

Return to Top
 News Archives
2022: Q2Q1
2021: Q4Q3Q2Q1
2020: Q4Q3Q2Q1
2019: Q4Q3Q2Q1
2018: Q4Q3Q2Q1
2017: Q4Q3Q2Q1
2016: Q4Q3Q2Q1
2015: Q4Q3Q2Q1
2014: Q4Q3Q2Q1
2013: Q4Q3Q2Q1
2012: Q4Q3Q2Q1
2011: Q4Q3Q2Q1
2010: Q4Q3Q2Q1
2009: Q4Q3Q2Q1
2008: Q4Q3Q2Q1
2007: Q4Q3Q2Q1
2006: Q4Q3Q2Q1
2005: Q4Q3Q2Q1
2004: Q4Q3Q2Q1
2003: Q4Q3Q2Q1
2002: Q4Q3Q2Q1
 Subscribe via RSS:
Add to My Yahoo!
follow us in feedly

  1. 2022 ICI Leadership Summit, May 25-26
  2. ALFI Roadshow to New York, May 25
  3. 2022 IDC Fund Directors Workshop, May 26
  4. Irish Funds Annual Global Funds Conference 2022, May 30-31
  5. WealthManagement Edge, May 31 - June 3
  6. MFDF 2022 Fund Governance and Regulatory Insights Conference, Jun 8-9
  7. 28th annual Expect Miracles East Coast Classic, June 9
  8. 2022 Sohn Investment Conference, June 9
  9. IDC webinar - Cybersecurity for Fund Boards: The Current Landscape, June 9
  10. MMI webinar - Driving Business Value with Artificial Intelligence & Data, June 15
  11. MFDF webinar - Key Takeaways From Morningstar's 2021 Annual Fund Fee Study, June 16
  12. MFDF Director Discussion Series - Open Forum (Chicago), June 21
  13. 2022 MMI Emerging Asset Managers Forum, June 23
  14. MFDF In Focus: Capitol Hill, A Conversation with Congressman Bryan Steil, June 28
  15. Financial Planning INVEST, Jun 28-29
  16. MFDF webinar - Differentiating Mutual-Fund-to-ETF Conversions, July 19
  17. MFDF Director Discussion Series - Open Forum (New York), July 20
  18. 2022 MMI Distribution Leadership Forum, Jul 20-21
  19. MFDF webinar - Fund Boards' Oversight of Investment Performance, July 28
  20. MFDF webinar - Performance, Perception and Manager Selection, September 14
  21. 2022 ICI Tax and Accounting Conference, Sep 18-21
  22. 5th annual Expect Miracles Atlantic Coast Classic, October 3
  23. Nicsa Fearless Leadership Symposium, Oct 6-7
  24. 2022 MMI Annual Conference, Oct 19-21
  25. 2022 IDC Fund Directors Conference, Oct 24-26
  26. 18th annual Expect Miracles Wine & Spirits Event, October 27

©All rights reserved to InvestmentWires, Inc. 1997-2022
14 Wall Street | 20th Floor | New York, NY 10005 | P: 212-331-8968 | F: 212-331-8998
Privacy Policy :: Terms of Use