The Longest Bull Market and What It Means for Selecting Managers
Is it just me, or are 10 year annualized returns trending higher? During the Great Recession of 2008 the market seemed to be in freefall. A bear market started in October of 2007, a couple months before the beginning of the recession, and finally bottomed in early March 2009, a few months before the end of the recession. We then entered the longest bull market on record*. Naturally, we would expect the 10 year rolling annualized return of the S&P 500 to trend upward. As the bull market persisted, those negative bear market months from 2007 started rolling off the 10 year return number at the end of 2017. After the February 2009 monthly return rolls off, the 10 year annualized return will be composed entirely of returns achieved during a bull market.
This is significant because asset managers often share this number with prospective investors (and their advisors), and investors often include this number in their criteria for selecting managers. Manager performance can vary greatly depending on the type of market(s) in which that performance is achieved.
The time frames managers use for presenting performance numbers are somewhat arbitrary. Generally, managers show annualized performance for 1, 3, 5 and 10 years and inception to date. This data may or may not accurately reflect a manager’s investment ability. For example, at the end of a 10 year Bull Market a manager might have strong performance as reflected in the 1, 3, 5, and 10 year returns. However, if that same manager tends to underperform in bear markets, that would not be evident based on his returns during an extended bull market.
When selecting a manager, it is helpful for investors to understand how a manager has performed over periods that encompass a complete (bull and bear) market cycle. Ten years is usually long enough to cover a full market cycle which have on average lasted five years. However, due to the extraordinarily long duration of the current bull market, the 10 year performance will only provide information on the manager’s performance during a bull market. This could lead to investors making their decisions using an incomplete data set. Also, a manager could have an investment strategy that might take a full market cycle to demonstrate its full value add. Shorter duration performance results may not be an appropriate measure of a manager’s long-term approach.
So if past performance is not indicative of future results, what is an investor to do? A better approach may be to thoroughly evaluate a manager’s qualitative factors in conjunction with quantitative performance metrics. Learn about the manager’s investment philosophy and how it was cultivated. Take time to understand the manager’s investment management process. It should be disciplined, repeatable and effective over a stated time horizon. The experience of the manager, both in the investment industry and with his or her current investment team, can be an important factor. It might make sense to invest with a longstanding manager who has been through a number of market cycles. At times, managers may make changes to improve their investment process or may add resources in the form of additional research analysts. Understanding when such changes were made and how they impacted the strategy could lead to better decision making.
Performance statistics for discrete time periods can be misleading. It might be useful to include qualitative metrics or more robust quantitative metrics when choosing a manager. Always work with a manger you know and trust, and absolutely take that little disclosure about performance at the bottom of this page to heart.
*A bear market is defined as a 20% or more market correction. On December 24, 2018 the S&P 500 Index, a capitalization weighted basket of the 500 largest public companies and a common proxy for the overall market, was down off its peak by about 20%. Other broad market indexes, including Small Cap indexes, were down by over 20%. Technically, we are currently in a bear market.
Disclosure: Past performance is not indicative of future results. It should not be assumed that any investment or strategy discussed in this publication will be equally profitable in the future. Investing involves certain risks including loss of principal. There is no guarantee that any specific investment strategy will be suitable or profitable.