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, a 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 10 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 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.
We previously mentioned that this bull market hasn't been smooth sailing for investors, so it's important to dissect the 10 years into rolling periods, and look at the manager's performance during shorter 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.
