Considerations for Underperformance

Understanding why a portfolio is underperforming is just as important as understanding if it is underperforming.

If your investment strategy is consistent, three years can be a short time to measure the performance of a portfolio. Broad market segments such as U.S. stocks, international stocks, and bonds go through periods of over- and underperformance. Similarly, sub-asset classes such as large cap value, small cap, and emerging markets do as well. A portfolio strategy that emphasizes one class over another will not always be in favor. For example, stocks fell in three consecutive years from 2000 through the end of 2002. Additionally, value stocks, growth stocks, and stocks from emerging markets have historically gone through some periods of underperformance. In most cases, the approach that served investors best was remaining disciplined to their strategy over the long-term.

On the other hand, if rather than maintaining a disciplined and diversified strategy, a portfolio’s strategy changes frequently, three years can be a very long time to allow a portfolio to suffer poor market timing or stock picking judgments.

Performance reports should be designed to help your organization’s fiduciaries fulfill their oversight responsibility and hold all those involved in the management of the portfolio accountable for the results. These reports should clearly display the information necessary to verify if allocations are in line with policy targets, and if overall performance is in-line with expectations.  Clear reporting, with appropriate policy benchmarks included, can help determine if investments are out of line due to strategy, or poor management.

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