In the article written by Greg Richmond and Alistair Byrne, CFA within the Investment Risk and Performance series published by CFA Institute, authors are examining the ways in which fund manager behaviour changes after the experience of a period of substantial underperformance.
When investment performance is good, the job of managing money brings many rewards. In addition to financial rewards, fund managers get positive feedback from their clients, their peers, and the firm’s management, and they receive all the satisfaction that comes from success. But what happens when the manager suffers a period of substantial underperformance? This experience brings few rewards and any number of unwanted pressures. Does it change investment behavior, and if so, is it for the better or the worse? How effective are firms in supporting their fund managers through the tough times?
The area was examined by carrying out structured interviews with 20 experienced investment professionals. All the participants had managed money and investment teams, and 11 were current or former chief investment officers (CIOs).
There were five changes in investment behavior that a majority of the participants had observed and considered to be unhelpful:
- Shifts in risk appetite
- Shortened time horizons
- Increases in loss aversion
- Lowered levels of engagement with colleagues and
- Increases in confirmation bias
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