Choosing money managers is challenging and we believe investors often make two crucial mistakes during the process. The first is selecting managers based mainly on recent performance. It’s like driving while looking in your rearview mirror - you have no idea what’s in front of you. The second mistake is choosing managers who historically do not perform well in the market environment we expect to occur moving forward. Which manager would you want to be with if you believe the market is about to deteriorate? One that is designed to protect your investments on the downside, or one that is structured to perform well in rising markets?
We’ll take a look at Churchill Management Group’s Premier Wealth strategy as an example to illustrate this concept which will hopefully provide you with some insight on a few ways to evaluate your current and future money managers.
(WrapManager has no affiliation with Churchill Management Group)
Chasing the ‘Hot’ Managers
It tends to be easier and more reassuring to invest with money managers who did well recently. However we believe you should look at longer-term performance rather than the last quarter or year. Focusing on recent performance could lead to chasing past performance, which we unfortunately see all the time. Performance chasers aren’t alone: many investors and advisors do it. We’re still amazed that it happens so often even though so many investors know better.
Think of chasing past performance like a kids soccer game. They all chase the ball around in one big group. This isn’t the best strategy, but they’re kids and don’t know any better. We believe it’s better to be where the ball is going to be, ready and waiting for the pass and hopefully scoring that goal. In other words, investing with a money manager before it does well. Wayne Gretzky once famously said “I skate to where the puck is going to be, not where it has been.”
We have found that in many cases, money managers who do well in rising markets may not do well in declining markets. If you have a belief about where the market is headed, understanding this could help you “be where the puck is going to be” and hopefully identify a manager that is positioned to do well in the coming market environment.
Our Monthly Top Ten Most Researched Money Managers shows the most popular money managers in our online directory. Managers usually appear on this list when they have recently performed well or poorly. Over the years it seems that people have a tendency to invest in money managers with recent outperformance, while avoiding managers with recent underperformance. Take a look at the list here and see if you recognize any of the current most popular managers in our online directory.
Churchill Management Group
To illustrate this concept, we’ll compare Churchill Management Group’s Premier Wealth strategy’s performance during rising and declining market environments. Churchill’s Premier Wealth strategy aims to preserve capital during times of high risk through the use of cash and cash equivalents. In the following paragraphs we’ll show how the strategy has historically protected investors in down markets and outperformed its benchmark in down markets. We think Churchill has an impressive long-term track record and was chosen for illustration purposes and is not meant to represent a recommendation.
Declining Markets
From January 1, 2000 - December 31, 2002 the S&P 500 declined 9.1%, 11.8% and 22.10% respectively, while Churchill’s Premier Wealth dipped only a few percentage points. During this period, a $1,000 investment in the S&P 500 would drop to $623, while declining to only $871 if invested in Churchill’s Premier Wealth.
The next large decline in the market occurred during the entire 2008 calendar year. If you invested $1,000 from January 1, 2008 – December 31, 2008, the S&P 500’s 37% decline would leave you with $630 compared to $954 with Churchill’s Premier Wealth. Looking at the two highlighted periods in the graph below, we see that the strategy (red line) accomplished its’ goal and protected on the downside overall compared to the S&P 500 (blue bars). Note that the strategy had a few negative quarters, but overall did not decline as drastically as the S&P500.
Rising Markets
Now let’s take a look at the January 1, 2003 – December 31, 2007 expansionary period. The graph below shows Premier Wealth’s excess performance (amount of return above or below the S&P 500 each quarter). Bars below 0% mean that Premier Wealth did not do as well as the S&P 500. During this expansionary period, a $1000 invested from January 1, 2003 – December 31, 2007 would have grown to just $1,361 with Churchill’s Premier Wealth, compared to $1,828 with the S&P 500 index! This is simply for comparison purposes as you cannot invest directly in a benchmark and thus there are also no fees deducted.
Looking Beyond the Face Value of Performance
The key point here is that some money managers may do well in rising markets, while others may do well in declining markets. Investing in a manager that does well during the expected future market environment is crucial. Churchill’s Premier Wealth did not do as well as the S&P500 in this expansionary period. In fact, the strategy only performed better than the S&P 500 in 3 out of the 25 quarters during 2003-2007 (net of fees)! We found that over the past decade, Churchill’s Premier Wealth has typically outperformed the benchmark in down markets while underperforming in rising, expanding markets. During these rising markets, even though the strategy had positive performance, you would have been paying for a strategy that did not do as well as the benchmark.
If you think the market is heading higher, you may want to consider a manager that has a history of outperforming their benchmark in rising markets. There are many money managers out there, including those who have a history of outperforming their benchmark over time. Take a look at our Top Equity Money Manager Picks for 2012 for a few money managers we currently like.
To be fair, Churchill has made our Top Ten Researched Money Managers list several times and for good reason. We think Churchill deserves a round of applause for their strategy and track record. Remember that Churchill was used to illustrate a point, and not as a recommendation to you. It’s also important to note that we believe diversifying your portfolio with multiple money managers is one of the best things you can do with your investments.
Interested? Get More Information Here
Give us a call at (800) 541-7774 or click here to request more information on Churchill’s Premier Wealth Strategy. One of our Wealth Strategists will be in contact with you shortly. It’s important to remember that this strategy is not suitable for everyone. Each financial situation is unique and needs to be assessed before deciding if this strategy is right for you.
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Discover how our process can help you and your family by answering a few short questions here. We believe that at the end of the process, you’ll have the confidence and trust in WrapManger to allow us the pleasure of helping to manage your wealth.
Net of fees performance data for Churchill was calculated using a 1.5% annual fee deducted quarterly (.375%) in advance. Fees charged may vary depending on advisor, money manager and style. WrapManager and money manager fees are described in Part II of their respective Form ADV documents which are available upon request. For more detailed information, please contact WrapManager. Statistical data and gross performance numbers are provided by the individual money managers and then prepared by Informa Investment Solutions, Inc. Growth of a dollar figures and net of fee performance data is then calculated based on this information. WrapManager does not assume any liability for erroneous information provided by an individual money manager and/or Informa Investment Solutions, Inc.
The S&P 500 covers 500 industrial, utility, transportation and financial companies in the U.S. Markets. The value-weighted index represents approximately 75% of the NYSE market capitalization. The S&P 500 is unmanaged and does not take into account any fees or expenses of investing in the individual securities tracked. Individuals cannot invest directly in an index. Historical performance of the S&P 500 is provided exclusively for comparative purposes only, so as to provide relevant information to assist an individual client or prospective client considering investment strategies. It should not be assumed that manager strategies and/or individual client account holdings will correspond directly to the S&P 500.
This documentation is being sent for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any states where such an offer or solicitation would be prohibited by regulations. Accordingly, no client or prospective client should assume portfolios presented (or any component thereof) serve as the receipt of, or a substitute for, personalized advice from WrapManager, Inc. or from any other investment professional. Past performance may not be indicative of future results. Therefore, you should not assume that future performance of any specific investment or investment strategy made reference to directly or indirectly by WrapManager in its literature or otherwise will be profitable or equal the corresponding indicated performance level(s). Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable for your investment portfolio. While we believe that diversification in an important aspect of a proper investment plan, diversification does not guarantee a profit or protection against loss in a declining market.
WrapManager, Inc. is an investment advisor registered with the SEC. The associated persons of WrapManager, Inc. may also be securities agents with Prospera Financial Services, Inc., a registered broker/dealer, member FINRA/SIPC. Opinions expressed are those of WrapManager, Inc. and are subject to change without notice and are not necessarily those of Prospera Financial Services, Inc., its directors, parent company or its affiliates. Securities offered through Prospera Financial Services and cleared through First Clearing, LLC which is an affiliate of Wells Fargo. Wells Fargo and WrapManager, Inc. are not related entities. Individual money managers presented in this report and WrapManager, Inc. are not related entities. However, WrapManager does recommend the use of the money managers presented to clients and shares client fees. The level of due diligence performed varies by money manager and product.