by Carter France, Senior Investment Analys, LPL Research
Most portfolio manager mistakes don’t feel reckless when they’re initially put into motion. The manager’s compelling track record and narrative over time leads to reasonable outlooks, portfolio themes, positioning, and trades. The story makes sense. Near term performance in these scenarios ranges from defensible to even impressive, and nothing appears broken yet from an outsider’s perspective.
A contrasting lens tends to be used when we view these mistakes in a backward-looking fashion. Often, lead portfolio managers and key investment professionals don’t fail because they lose skill or discipline. They fail because something subtle has changed — and no one had the time, perspective, or framework to catch it early. The mistake evolves into something that appears obvious, and the initial decision-making no longer looks smart but rather avoidable. Those early conversations that centered around opportunity have now evolved into explanations as managers find themselves playing defense.
The Problem Isn’t Bad Managers — It’s a Focus on the Symptoms Over the Root Cause
When many investors review investment strategies, performance is often the starting point. And understandably so. Returns are visible, easy to compare, and they’re typically what clients notice first when presented with a fact sheet, marketing materials, or research database.
But performance screens are backward‑looking by design. They tell you what has happened — not whether the conditions that made that performance possible still exist.
In our research, early warning signs rarely show up in returns. Instead, they surface quietly in places like:
- A shift in how decisions are made inside the firm
- Asset growth that subtly changes how a strategy is implemented
- Incentives that start favoring asset gathering over process discipline
- Risk exposures that look benign individually but could be dangerous in combination
Few of these warning signs present early, alarming symptoms. By the time symptoms reach an alarming level, the damage to 1- and 3-year-trailing performance figures is sometimes already done.
That’s why manager mistakes almost always look intelligent in real time. The inputs still appear sound. The output just hasn’t been tested yet.
What Institutional Research Thinks About Differently
One of the biggest differences between institutional manager research and individual selection is the questions being asked. Instead of asking: “Has this manager performed?” We ask: “Are the conditions we’ve identified as conducive to consistent risk-adjusted returns and excess returns still present and what could realistically go wrong?”
That shift matters.
It forces you to move beyond stories and into structure. Beyond past success and optimism and into future durability and probability.
Great past performance doesn’t fail all at once. It erodes at the edges — through capacity strain, process drift, team changes, or creeping exposure to undesirable risks.
Avoiding Mistakes Beats Chasing Stars
High‑quality manager research isn’t always about finding the next star manager before everyone else does. In a large, vast investment universe, that can be a low‑probability game with high opportunity costs.
It’s about avoiding predictable paths to failure.
Managers rarely underperform because of one big decision. They tend to underperform because a series of small changes go unchecked — each one reasonable on its own, but collectively transformative to the strategy’s risk profile.
The goal isn’t perfection but rather stacking the odds in the investor’s favor across full market cycles.
For client portfolios, that often translates to:
- Fewer surprises
- Performance that may align with expectations
- More consistency across different market environments
- And fewer uncomfortable client conversations that begin with, “This made sense at the time.”
That last one matters more than most advisors admit. From an end client’s perspective, reasonableness in hindsight and not in the present doesn’t inspire confidence in an investment professional.
Where Our Internal Coverage List Can Help
We continuously pressure‑test portfolio managers on our internal Coverage List via onsite visits and virtual interviews, not to predict exact outcomes, but to help reduce avoidable mistakes.
We focus less on trying to forecast who will outperform next year and more on understanding:
- Whether a manager’s process is still intact
- Whether firm or strategy growth has altered execution
- Whether decision-making authority is clear and stable
- Whether risk is being taken consciously or accumulating unintentionally
In a world where time is the scarcest resource, signals matter more than stories. Good narratives are easy to find. Durable processes are harder.
The internal Coverage List is designed to help advisors identify strategies that exhibit characteristics that contribute to long‑term outcomes, so portfolios don’t just look smart at the time but potentially hold up when it matters. For LPL advisors, we welcome discussions about the Coverage List. For investors, please contact your LPL advisor for details.
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