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Australia's top fund managers have had an end to the year they would rather forget with big name stock pickers John Sevior, Hamish Douglass and Kerr Neilson all lagging the benchmark.
The recovery of oil prices, a rally in mining stocks and the Trump-inspired reflation trade have all weighed heavily on our best known fund managers – with each of them underperforming over the three years to December 31.
While fund managers and asset consultants deny that poor results over the short term are putting them under pressure, the extra attention on each monthly result is surely an unwelcome distraction.
Airlie Funds Management founder Mr Sevior is among those who had a challenging December when his flagship Airlie Concentrated Share Fund lagged the benchmark by 258 basis points.
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"You always want to win over all time periods but there's no pressure. I don't mean to sound complacent but there are no catastrophic mistakes in those numbers," Mr Sevior said.
Airlie was not alone. In December Mr Douglass' Magellan Global Fund lagged the benchmark by 110 points and Mr Nielson's Platinum International Fund lagged the benchmark by 133 points. Over three years the underperformance is less pronounced but still evident.
Asset consultants, who advise the giant industry funds on which fund managers to invest with, emphasise that even the best managers will experience periods of underperformance.
Willis Towers Watson investment consultant Ben Griffiths says that investors who can't handle periods of volatility need to rethink whether active management is right for them.
"All skilled managers will underperform at times. Some skilled managers will go through periods of underperformance lasting for two or three years. Warren Buffet has underperformed for seven years at times," Mr Griffiths said.
Despite these reassurances, veterans say that portfolio managers typically start feeling the heat much earlier.
Peter Morgan, former head of equities at Perpetual and founder of 452 Capital, said that in his experience, institutional investors with big mandates could be impatient.
"If you have two bad quarters you are under enormous pressure to catch up," he said.
Mr Morgan recalls taking a contrarian position on News Corp which was deeply unpopular with clients when the stock rallied. He held fast and ultimately was vindicated when the tech wreck took the wind out of its sales.
Experts say that once a skilled fund manager has been identified, ensuring that they are sticking to the process is more important than short-term measures of performance.
JANA head of advice delivery, John Coombe, says that typically clients do not start to question the abilities of a fund manager until the underperformance hits the five-year mark.
"As long as a manager is true to style, then you will forgive short-term underperformance as long as they have demonstrated they can add value over the long term," Mr Coombe said.
While the rhetoric is one of patience, the reality is that funds management is extremely competitive. The monthly Mercer tables that list the performance of fund managers contained only 25 funds in the early 1990s. Today there are 500 or more Australian equity managers and each of them needs to demonstrate how they add value.
Mr Sevior's Airlie Funds Management has not been immune.
The firm quietly shuttered its broad-based equity fund in May 2016 after underperforming the benchmark by 96 basis points over three years and 403 basis points since inception less than four years earlier.
The unit holders have since been rolled over into Airlie's Concentrated Share Fund.
Horses for courses
JANA's Mr Coombe says it's important to recognise that investment strategies go in and out of style all the time.
"I don't think I know anyone who has found the holy grail of when to buy growth stocks and when to buy value stocks," Mr Coombe said.
Another observer said it was pointless comparing the two styles of investment – growth or value – as the managers were practising different religions.
Mr Sevior, for instance, says that he doesn't believe that he has any particular edge with cyclical stocks. His funds are therefore likely to underperform during any period where cyclicals, such as mining stocks, have rallied hard.
Despite their differences, Magellan and Platinum also have very clear ideas of which stocks add value over time. It makes sense that they will over and undershoot the benchmarks at times.
Mr Griffiths said that it would be more concerning if an investor known for a particular style was to abandon it and chase performance for its own sake.
"If there was a fund manager that was facing a headwind and they started piling into mining or oil and they have previously avoided these stocks we would be very concerned," Mr Griffiths said.
"But at the same time there are other managers who are more flexible about the types of stocks they will own. They are less philosophically driven and more market driven."
Experienced market participants say that above all it's important to be familiar with the particular fund manager's style. To look through cycles and reconcile the returns with the particular approach.
"If anything we have been too cautious. At the end of the day, I'd rather be accused of being too cautious than being reckless," Mr Sevior said.