One of my favorite investment reads is The Route to Performance by Oaktree Capital’s Howard Marks. Marks starts by disputing the argument that more risk means more return, “If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too.” Instead of outperformance, this philosophy can lead to a “long-term record which is characterized by volatility and mediocrity.” He then recalled a meeting he had with a pension plan director:
“We have never had a year below the 47th percentile over that period or, until 1990, above the 27th percentile. As a result, we are in the fourth percentile for the fourteen year period as a whole.”
Instead of taking big risks, the pension plan director aimed for consistent performance, resulting in stellar long-term performance as peers self-destructed.
The Howard Marks note was written in 1990, but is still relevant today. The SPIVA Persistence Scorecard further debunks the idea of an investment strategy placing in the top 10 (or even 50!) percent of its peer group every year. Investment manager selection isn’t about picking what fund will outperform in a calendar year, it’s about finding consistent performance. For most asset classes, that means buying the index.