The Folly of Hiring Winners and Firing Losers

Abstract

The standard procedure of firing losing managers and hiring winning managers based on their past three-year performance leads to losses. Investors need to look forward—not just back—when allocating to fund managers by using a measure of expected fund returns that considers factor exposures, fees, manager skill in security selection, and factor expected returns estimated based on relative valuation. As investors and their consultants gain a better understanding of the predictive efficacy of relative valuations in factor and strategy performance, they gain an objective reason to avoid the blunders of performance chasing.

TOPICS: Manager selection, performance measurement