Assessing Performance…again

What are the key metrics for assessing performance for investing?
• A record spanning a large number of years
• A window that includes a good, bad, average year
• A benchmark against which success can be measured
Let’s quickly look at Penn’s endowment fund and a few lessons learned from its management. This is a little outdated, but still relevant. As Mark Twain said –‘history doesn’t repeat itself, but it sure does rhyme’.
John Neff led Penn’s endowment for roughly two decades starting late 1970’s and he was a respected investor of that era and was known for his adherence to value investing. The fund outperformed for the most part of his tenure.
But during the 1995-1997 era, the fund lagged most of its peers and during the 2000 era, the fund lagged even more because of its non-exposure to tech / venture capital.

But the first lessons that was learned here was that even though during 1995-99 era the fund returned 16%, and that kind of return should have been enough for the exposure at hand, it was hard for alumni not to question the fund’s management on why the fund was lagging its peers, and even worse, not getting money on the basis of “l’d love to give my money, but I’d rather invest somewhere else now, make more money there, and then give it to the endowment”.

So regardless of whether the investments make money or not, if it doesn’t meet client expectations, it’s not doing what it’s supposed to.
In 2000, when Howard Marks took over, he faced the classic investment dilemma, was it time to play offense or defense? Or more simply put, the question was whether stress offensive high return requirements or to reduce likelihood of losses. Of course, most investors want a balance of both things, but the question is in what proportion.

In Penn’s case, there was a lot to do with playing defense; in fact, the situation at hand raised the question whether Howard Marks should continue to play defense in case the market turns, or should he go offensive in order to make up lost ground. Penn’s fund faced the particular dilemma, should investments be made defensively in order to not lose capital, or offensively in order to close the return lag gap. But the Marks didn’t give in to chasing offensive returns; he gradually invested in growth stocks and Private equity.

The result was quite predictable. The fund outperformed when risk-taking was penalized and underperformed otherwise. Over 10 years, Penn’s fund returned 5.5% when others returned 6-7%. But average results don’t tell the whole story; ‘A man six foot tall drowns in a five feet deep river on average’. Investing is not about averages, it’s about surviving the worst, and doing better in times that are good.
But on more philosophical terms, even when people do the right things, the timing of assessment plays an important part in perception of success and failure.
Random events can make good decisions look wrong and bad decisions look right, and investors are ruthless in their assessment here, and all they care about is their returns.

The bottom line is, be considerate of assessing records and bear in mind that timing can be imprecise.

The actions at Penn’s endowment fund might have been right, but for the wrong reasons. No strategy works all the time, and even if it does, was it actually good, or lucky? I’ll leave that for you to decide.
Choose well.

Adapted via: Oaktree