I listened to a fascinating webinar to explain outperformance by fund managers. The key focus described was ‘conviction’.
In other words, fund managers use conviction in the decisions they make with your money. Conviction is an emotion. As such, emotion plays a large part in what fund managers and traders buy, sell and hold. Does that surprise you or not?
Could it be argued that conviction is a little like placing a bet. The bet may succeed, but it may not. As such investment managers have to decide how much conviction to apply. Bearing in mind if they are wrong what are the consequences? In general, fund managers are more likely to scale back conviction as their motivation is not on outperformance but assets under management. If they end up being average, they are still more likely to keep investors’ money. That means they still get paid.
What does this mean? The more deeply you think about fund managers’ decision-making, the more likely they will trend to the average.
If they trend towards the average, there is no outperformance. If there is no outperformance, what are you paying them to do for you?