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Since the bottom of the Credit Crisis in 2009, investors have experienced the second longest bull market in history, resulting in solid investment returns. This bull market hasn’t been all smooth sailing however, as investors recovered from the recession, they had to deal with the Euro crisis, U.S. Treasury downgrade, turmoil in Greece, the Chinese market correction, and Brexit.


Just like every prior bull market, this one can’t last forever, so the question then turns to, “how do financial advisors prepare client portfolios for what comes next?” When looking back over the past ten years, financial advisors should look beyond annualized returns and consider rolling returns along with consistency and downside risk measures in analyzing manager performance over this unique bull market.


Below we dissect the annualized returns of two managers to see if consistency rewards investors, or if investors should chase the top-ranking mangers, while ignoring times of underperformance. We also review statistics that measure consistency and locate managers that excel in these areas.


When creating a long-term portfolio for a client, a financial advisor should look beyond the typical annualized time periods. For example, take Fund ABC and Fund XYZ, both mid-cap SMA managers. As you can see in figure 1, Fund XYZ shows superior annualized returns over the common time periods.




Figure 1

Figure 2 shows a similar story, with Fund XYZ outperforming the majority of its peers, particularly over the one, five, eight, and nine-year time periods. However, these graphs only tell part of the story.



Figure 2

We previously mentioned that this bull market hasn’t been smooth sailings for investors, so it’s important to dissect the ten years into rolling periods, and look at the manager’s performance during smaller time periods.


As you can see in figure 3, the rolling returns start to reveal some holes in Fund XYZ’s story. When looking at the 36-month moving windows, you can see how Fund XYZ has periods of stellar performance, along with some periods of very poor performance. In the table, we also see that Fund XYZ has a better median rank compared to Fund ABC, however, Fund XYZ’s volatility of rank is considerably higher. Fund ABC may not possess periods of stellar performance, it does however display greater consistency against its mid cap peers.



Figure 3

Based on what we know from figure 3, the information in figure 4 should not come as a surprise. Fund ABC displays superior consistency over the past ten years. This table confirms that Fund XYZ takes big swings, sometimes hitting homeruns and at other times striking out, while Fund ABC is successful with hitting singles and doubles. Figure 4 also shows that Fund ABC does a better job of preserving capital during market downturns or a crisis. Consistency allows your clients to sleep at night, while reducing downside risk helps preserve your client’s assets during a crisis, so they can capture more of the recovery.



Figure 4

As you can see in figure 5, consistency wins out, as Fund ABC rewards investors with a cumulative return of 141% versus 109% for Fund XYZ. Even though Fund XYZ hit some home runs along the way, the periods of underperformance really hurt when compared to the consistency of Fund ABC.



Figure 5

When searching for managers that display a knack for consistency, the below table displays some different metrics that financial advisors should consider.




Zephyr K-Ratio

Measures the rate at which wealth is created and the consistency of the path of wealth creation.

Information Ratio

Measures the excess return against the benchmark divided by tracking, where tracking error is the consistency measure.

Tracking Error

Measures how consistently a manager outperforms or underperforms the benchmark.

Batting Average

Measures the percentage of time an active manager outperformed the benchmark


The table below shows managers that stood out from the crowd when using the above statistics to filter through the PSN Global Manager Neighborhood database.



Source – Zephyr StyleADVISOR, PSN Global Manager Neighborhood. Data as of 6/30/2017


When considering adding a manager to your client’s portfolio with thoughts of a correction or bear market on the horizon, it’s important to determine how a fund arrived at its current value - was it a bumpy or smooth ride for your client? As your clients move along their time horizon, they may not be able to afford a deep market correction, especially if their investments tend to fall with the market.


During long bull markets, most managers have appealing returns, so it’s important to peel away the layers and dissect the performance into smaller periods to uncover trends or periods of underperformance, which may expose a manager who doesn’t fare well during market down turns, and one that takes large bets which sometimes payoff while sometimes do not.


Ryan Nauman is a VP, Product and Market Strategist at Informa Financial Intelligence.


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