Does short-term performance matter?

Does short-term performance matter and is a performance culture good?

The answer is yes and no. It is undisputed that long-term performance does matter but short-term performance is another matter. A lot comes down to definition – what is long term and what is short term? Short term is usually considered as periods under one year while long term is considered three to five years or more. A lot of short-term performance is considered ‘noise’. Sometimes, but not always, fund managers sacrifice short-term performance for higher long-term performance. An example could be unlisted property and unlisted alternatives such as private equity where you get an illiquidity premium that leads to superior long-term performance. The illiquidity premium is often one per cent plus over the longer term, which can be very important in the low return environment we are currently in.

There is often talk there is too much emphasis on short-term performance and that organisations should pull out of the monthly surveys. Of course, over-emphasis on monthly and quarterly surveys is unhealthy – but it’s useful to remember that the long term is a just collection of short-term periods.

It can be seen as a cop-out if organisations, CIOs and investment teams are reluctant to be measured. Life would be easy if our performance was never measured and we are not held accountable, no matter what returns we achieve. If organisations are measured over a very long period it becomes meaningless.

Let’s say, for instance, we choose a ten year measurement for performance, based on the argument that two investment cycles are needed to accurately measure the performance of the fund manager/super fund. This makes sense, except what happens if at the end of the ten year period the assessment was that the performance was poor?  The underlying investor may have endured the full ten years of poor performance to find out they should not have invested with the organisation. In reality we should be measured over the short, medium and long term – with the usual caveats.

The important thing is not whether we are measured over the short term or not but how the data is interpreted. In this sense, education and common sense are important. As mentioned earlier, the long term is a collection of short terms and the short-term numbers are often a sign post or an indication as to whether strategies are working or not and a test of whether our exposures are what we expected them to be and whether tilts etc are working or not. Thus the short-term numbers can provide valuable information in running a portfolio and provide early warning signs of impending trouble and let managers change course.

In Bill Clinton’s 1992 Presidential election campaign his campaign strategists came up with the slogan “it’s the economy stupid” to keep focus on what really mattered – and he went on to win the election. I have adapted this to say – with respect to investment management – “it’s the performance stupid” because, in the end, clients retire on a dollar amount and performance is critical.

Those who say risk is more important than performance lose sight of the fact that risk is an integral part of any investment decision and is ultimately reflected in performance.  For instance, if an investor loses all their money then of course performance will be poor. In other words, to get good performance risk has to be factored in.

Is the performance culture good?

In the end analysis I would much rather have a ‘performance culture’ than not. In my experience this is a critical part of superior long term performance, and organisations that tend not to have this emphasis are more likely to underperform. It is easy to hide behind excuses and distractions in the modern investment world, but investment numbers offer no place to hide.

Performance analysis and attribution is important, even critical to enhance an organisation’s performance. Recognition of problems is critical if you want to address them and improve performance. Analysis of good-performing ‘peers’ is also important in learning from and improving our own performance.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.