Quantcast
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
CLICK HERE

0.0
 Do You Recommend This Story?



GO TO: MFWire
Return to Top
 News Archives
2024: Q4Q3Q2Q1
2023: Q4Q3Q2Q1
2022: Q4Q3Q2Q1
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:
Raw XML
Add to My Yahoo!
follow us in feedly


  1. MFDF webinar - BDC Board Service 101, December 10
  2. WE Boston - Give Back Event, December 10
  3. IMEA Distribution Council webinar - Unlocking Your Competitive Edge: Driving Results Through Net Promoter Excellence, December 10
  4. WE New York - End of Year Celebration, December 11
  5. MFDF webinar - ETF Product Trends: Board Implications, December 11
  6. Nicsa webinar - The Virtues of Corporate Culture, December 11
  7. MFDF webinar - Visually Mapping Board Composition: Skills Matrices in Fund Board Rooms, December 18
  8. IMEA webinar - Driving Equity: The FARE Journey and Its Impact on Financial Services, December 19
  9. MFDF webinar - 2024 Fair Valuation Pricing Survey: Building and Strengthening the Valuation Operating Model, January 7, 2025
  10. MFDF webinar - 15(c) White Paper Webinar Series: Part 2 – Board Processes, January 9, 2025
  11. MFDF webinar - AI and Fund Compliance, January 21, 2025
  12. MFDF In Focus - In Focus: Small Boards' Use of Skills Matrices, January 22, 2025
  13. MFDF 2025 Directors' Institute, January 27 - 29, 2025
  14. FSI OneVoice 2025, January 27 - 29, 2025
  15. 2025 ICI Innovate, February 3 - 5, 2025
  16. MFDF Director Discussion Series - Open Forum, February 10, 2025
  17. MFDF Director Discussion Series - Open Forum, February 11, 2025
  18. MFDF 2025 Fund Governance & Regulatory Insights Conference, March 6 - 7, 2025
  19. MFDF Director Discussion Series - Open Forum, April 2, 2025
  20. Envestnet Elevate 2025, April 9 - 10, 2025
  21. MFDF Director Discussion Series - Open Forum, April 15, 2025
  22. The 36th Sub-Advised Funds Forum, April 29 - 30, 2025
  23. Morningstar Investment Conference 2025, June 25 - 26, 2025
  24. MFDF Director Discussion Series - Open Forum, July 9, 2025




©All rights reserved to InvestmentWires, Inc. 1997-2024
14 Wall Street | 20th Floor | New York, NY 10005 | P: 212-331-8968 | F: 212-331-8998
Privacy Policy :: Terms of Use