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Past managers of the year

This article following up on how past MarketWatch Managers of the Year fared in 2008 vividly reinforces what we say in SMI's Performance Momentum & Upgrading bonus report:

Upgrading is necessary because, as economic conditions and expectations change, market leadership rotates among large-, medium-, and small-sized companies. Furthermore, as this rotation takes place, it naturally favors some strategies over others. At times, a cautious value strategy is best; other times aggressive growth investors are rewarded. But although market conditions are constantly changing, fund managers rarely do. ...

That's why performance leadership among mutual funds is constantly rotating, and why numerous academic studies have shown that very few funds can consistently perform in the top ranks year after year. ...

The best approach, then, is not to try selecting one super-great fund in order to hold on to it for many years. Investing in a particular fund and staying with it for the long haul is unlikely to result in outstanding performance over the entire period.

Two of the past three managers of the year cited by MarketWatch lost at least 52% last year (the third manager took a leave of absence midway through last year - good idea, wish I'd thought of doing that!). While we were admittedly a bit disappointed with Upgrading's results in 2008, it's worth noting that these recent Manager of the Year funds lost a third again as much (an additional 13%) as Upgrading.

Don't misunderstand what I'm saying. These are likely all fine managers, running fine mutual funds. The problem isn't with the specific funds. The problem is with the idea of sticking with any "normal" mutual fund through the ups and downs of a full market cycle. Upgrading allows us to capture the best periods of each fund type, while shifting us elsewhere when their inevitable rough stretches arrive.

Last year reminded us that Upgrading won't always protect us as well as we'd like. But compared with other "top funds" of recent years, its performance looks a little better. More importantly, a longer view reveals that Upgrading has done an excellent job of moving us among funds of different styles and approaches in response to changes in the broader market.

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