Why Your Fund Manager's Track Record is Meaningless!!!

In our travels we have done a fair amount of Manager Due Diligence. Small cap funds, hedge funds, emerging market funds, mutual funds, separately managed accounts. We have reviewed the pitch books, had dinner with the portfolio managers, meet the analysts, and been schmoozed by the IR and client services teams.

We have noticed that great track records are damned lies and statistics.

The track records were built between 10m-200m $. Then after they have some funds and a good record the managers populate the mutual or hedge fund databases. The fund appears "top of peer group all of a sudden." The early years are friends and family money, with maybe a couple of deep pocketed investors. Often the fund is not available to the public. The manager doesn't have the pressure of withdrawals or media scrutiny.

It lures in the Investment Consultants. They can offer their HNW clients a new fund "with top 2%" 10-year track record. Then it gets bloated and great ideas that came from one or two portfolio managers, are diluted by a team of sector analysts often with MBAs from excellent schools, but offering little investment acumen themselves. This works though, as the consultants are made to feel better. Who wouldn't like a 26 year old from Denver (insert any city you like) doing analysis on small cap Russian stocks! Then the funds are crammed into 401ks, manager platforms, peddled by exclusive bank and trust companies . . . and the fund manager shadows the index and gets rich from fees.

So while I have seen 25 year 16% annualized track records, it was in a way meaningless. 95% of all PMs I met became "average" at 100- 200m of AUM in 1 fund.

Tudor Jones, Soros, Buffett, Louis Bacon and definitely John Paulson could still excel. I am sure I have left out some of the greats, but few others can outperform for long managing a $1b fund.

Don't believe me? Check the GIPS compliant track record of your favorite fund. Look at AUM and composite numbers. The bulk of the outperformance was two guys sitting in grandma's basement.

That is not to disparage small funds. Not at all. We find smaller funds to be the best of all and have the highest of professional respect for the lone fund manager that says, "I can't truly handle $1b in my fund."