Nobody enjoys failure, and the stock market makes it pretty cut and dry as to who succeeded and who didn't in any given year. While investment performance is arguably one of those areas of life where the cliché "it is what it is" would seem to apply, that doesn't stop investors and investment managers from trying to put a spin on poor results.

Anyone who invests long enough will have bad years, and there may well be good reasons to believe that a particular time period's poor performance is unusual or exceptional. That said, investors would do well to be on the lookout for some of the popular ways people try to mask poor performance.

"It Could Have Been Worse"
Relative performance may be one of the most abused statistics in investment management and performance reporting. While organizations like the CFA Institute have done a lot to improve the standards of benchmarking and performance reporting, the fact remains that many underperforming managers try to use relative performance numbers to mask their failings.

If an investor is expecting 10% returns and a manager delivers negative 10%, the fact that a few other managers did even worse is cold comfort. Along these lines, the laggards have a habit of digging far and wide to find examples of competitors or markets that did even worse, while ignoring the fact that many others still managed to perform reasonably well. Likewise, managers may point to indices or benchmarks that did even worse, despite the fact that the portfolio isn't all that similar to the benchmark in question. While comparing a fund or manager to peers and benchmarks is only natural (why own a chronically under-performing fund instead of an ETF?), investors have to be on the lookout that style drift hasn't made such comparisons misleading.

"The Market Is Wrong"
When in doubt, blaming the market is a time-tested way of spinning results. Most investors realize that the price of an asset on any given day may diverge significantly from its long-term intrinsic value, and lagging managers are not above trying to excuse their performance by claiming that the market is wrong and that patience will show the real value of the assets.

This excuse is arguably easiest to use in cases where the investments in question are complicated and/or illiquid, and it was a common one to see in the days when mortgage bond investment firms were reporting horrible results. That said, plenty of equity fund managers try this spin as well, claiming that the market doesn't yet appreciate a particular company (or sector) and that current valuations dramatically understate the real value.

"If You Just Look Past the Numbers ..."
One of the more creative ways to talk around bad results is to try to change the frame of reference or analysis. Investment managers will often spin yarns about how well the year/quarter/month was going until some unavoidable calamity struck, and if you just look at the pre-calamity results, you'll see that performance was actually pretty good.

Investment managers may try to stretch or shrink the period of analysis to capture/exclude periods of better/worse than average performance. In other words, a manager who has delivered a bad quarter may try to bury the bad news amid discussions of year-to-date or trailing 12-month performance. Some managers will also try to sub-divide their performance reports and guide attention away from the areas of bad performance; focusing on how the fund's picks in certain sectors actually beat the market, and ignoring the overall results.

Lastly, some managers will try to abuse various measures of risk and volatility to excuse poor performance. The way this spin job works is as follows: "we underperformed the benchmark, but our results were less volatile (or we took less risk), so on balance we do not believe we underperformed." This might be relevant if there was a widely accepted mathematical formula for measuring risk, but in practice, it's often just a shell game designed to obscure poor absolute performance.

"There Are Now Numerous Bargains"
Another way of spinning poor performance is to basically ignore or minimize it in the context of the promise of even better future results. This is especially common to hear after periods of broad-based sell-offs, while recent performance has been awful, there are now plenty of bargains to buy and future performance will be even better as a result. What goes left unsaid is why an investor should expect that a manager who was unable to foresee and avoid the declines will be able to spot the real bargains on the way back up. Moreover, investors do well to remember that it takes out-sized gains to recoup losses; an asset that loses 10% and then goes up 10% is still down 1% from the prior peak.

The Bottom Line
Evaluating investment manager performance is not an exact science and even the best investors have stretches of underperformance. What's important for investors to evaluate in times like these, is the integrity and openness of the manager in question. Good managers take their lumps and attempt to offer honest assessments of where they went wrong, while lesser managers will try to distract, mislead and manipulate you.

When in doubt, just remember that good performance doesn't demand much in the way of explanation and that managers who suddenly start playing fast and loose with reporting periods, comparables and market efficiency are likely telling you even more about their capabilities than they realize.

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