When Fund Managers Underperform: Why Due Diligence Matters More Than Market Narratives

Invest well, we all need to invest well, with due consideration for the changing world.In the world of investing, performance is rarely a straight line. Even the most celebrated fund managers experience years when their strategies fall out of favour. Markets shift, liquidity dries up, interest rates rise, and the environment that once rewarded bold bets suddenly punishes them. None of this is unusual. What is unusual—and far more concerning—is when managers respond to underperformance by blaming the market, abandoning their own strategies, or quietly slipping away when the tide turns.

A good year does not make a genius, and a bad year does not make a failure. What matters is how a manager behaves through both.

The Problem With “Jump‑Ship” Managers

Some managers thrive during periods of abundant liquidity or ultra‑low interest rates. Their portfolios soar, marketing machines roar to life, and investors pile in. But when conditions normalise, the same managers sometimes:

• Blame macro conditions rather than their own decisions
• Pivot wildly to new strategies in search of quick redemption
• Or, in the worst cases, leave the fund altogether, leaving investors holding the bag

This behaviour reveals something crucial: their success may have been more about the environment than their skill.

A rising tide lifts all boats—but only the well‑built ones stay afloat when the tide goes out.

Why Long‑Term Skill Matters More Than Short‑Term Performance

Every manager will have off years. That’s not only acceptable—it’s inevitable. What matters is:

• Consistency of process
• Transparency during difficult periods
• A willingness to adapt without abandoning core principles
• A track record that shows long‑term value creation, not just lucky streaks

A manager who has a few bad years but works to remedy weaknesses, reassess assumptions, and strengthen their approach is far more trustworthy than one who disappears at the first sign of trouble.

The Importance of Due Diligence

Before allocating a meaningful portion of your pension, ISA, or long‑term savings to any fund, it’s essential to understand who is managing your money and how they think.

Good due diligence means looking beyond glossy marketing materials and asking deeper questions:

1. What is the manager’s investment philosophy?

Is it coherent, repeatable, and grounded in evidence—or does it change with the wind?

2. How has the manager performed across different market cycles?

A manager who only shines in one type of environment may not be truly skilled.

3. How do they communicate during downturns?

Do they take responsibility, explain their thinking, and outline a plan? Or do they blame external forces?

4. What is their long‑term track record?

Not just the headline returns, but risk‑adjusted performance, drawdowns, and recovery patterns.

5. Are incentives aligned with investors?

Managers who invest alongside their clients tend to behave differently from those who don’t.

Liquidity, Low Rates, and the Illusion of Skill

The last decade created many “stars” whose performance was amplified by:

• Cheap money
• High liquidity
• A market that rewarded growth at any price
• A surge in speculative enthusiasm

When these conditions reversed, many of those stars dimmed quickly. This doesn’t mean they were frauds—but it does mean investors must distinguish between environment‑driven returns and manager‑driven returns.

Understanding this difference is one of the most valuable skills an investor can develop.

Know Who You’re Involved With

Whether in investing, business, or personal relationships, the principle is the same:

Understanding the people you engage with always pays dividends.

A fund manager is not just a name on a factsheet—they are the steward of your capital. Their temperament, discipline, humility, and decision‑making process matter just as much as their performance numbers.

When you choose a fund, you’re not just choosing a strategy.

You’re choosing a person.

Final Thoughts

Markets will always cycle between euphoria and fear. Fund managers will have good years and bad years. But the managers who endure—the ones worth trusting—are those who:

• Stay accountable
• Stay consistent
• Stay invested in their own process
• And stay with their investors through thick and thin

For anyone building long‑term wealth, due diligence isn’t optional. It’s the difference between chasing yesterday’s winners and partnering with managers who can deliver value over decades, not just market cycles.