According to an article in CFA Institute, “The science of evaluating portfolio managers and then determining who to keep and who to send packing is straightforward—or so you would think. But the evidence remains financial advisers and their clients continue to make the same decision mistakes over and over.”

The article explains that, typically, the process involves taking stock of percentage returns of different investment strategies and ranking managers against them. As a general rule, it says, the top performers rarely stay there after one year, while those who underperform tend to rebound. “If a portfolio manager continues to implement the same process that produced the results that attracted the decision maker in the first place, logic should dictate no changes are necessary. But of course, in financial markets, logic does not always prevail.”

Too often, the article argues, those in charge of selecting portfolio managers focus too much on outcomes and not enough on process, “which inevitably leads to problems down the road” and can put portfolios at risk. Conversely, it adds, “we know there are occasions when a good process can lead to bad short-term results.”

When it comes to manager selection, the article says, the following points should be considered:

• Success requires “developing a disciplined process;”
• An “excellent process will yield bad results some of the time.”
• The “best practitioners in all probabilistic fields not only focus on process but appreciate the role time has in delivering outcomes.”

The article concludes: “Evaluating good investment performance is not just tabulating outcomes but understanding how a portfolio manager’s process ultimately delivers the long-term results clients seek.”