Even though investment results are pretty objective, that doesn't stop managers from attempting to put their own spin on them - taking victory laps in the good years and passing the buck in the bad. Some excuses are more common (and more disingenuous) than others, so investors would do well to be on the look out for these familiar weak excuses.
Look for Explanations, Not Justifications
Right off the bat, it's important to recognize that many investment managers do conduct themselves with integrity and are willing to communicate candidly about the reasons why the assets under their management failed to perform as expected.
These managers will often highlight particular mistakes or instances where the markets developed contrary to their expectations. Perhaps the manager made a few bad stock picks or failed to pick a couple of real winners. In other cases, portfolio allocation could be at fault - picking the wrong asset types, markets and sectors can wreck performance, and so can keeping too much (or too little) cash.
To a certain extent, these are forgivable mistakes (though they must be viewed in the context of long-term performance, relative performance and the cost of those services).
Don't Blame Me, It Was the Market's Fault!
One of the more common ways that managers will try to cover for mistakes is by passing the buck all the way back to the market. Now to a certain extent, this can be legitimate. If an investment manager invests solely in U.S. equities and major U.S. indexes are all deeply in the red, it's probably not fair to expect great performance in that year.
Most managers work with a broad mandate, though, and can move assets between classes like equities, bonds and so on. Likewise, feckless managers may try to blame markets that had little or no bearing on their mandate - blaming poor small-cap performance when they run a blue-chip portfolio or vice versa.
It's also worth noting that there's almost always better performance and money to be made somewhere. Even in the worst of the post-tech and post-housing bubbles, there were stock markets around the world that rose and plenty more sectors and individual stocks that were in the black. So while blaming a bad market for poor performance is easy, investment managers are typically hired with the expectation of doing better than the market and should be held to that expectation.
I Confess, They Did It!
Closely related to blaming the faceless and impersonal market is finding other scapegoats for poor performance. At various times in the last couple of decades, managers have tried to explain market moves by claiming that it was the Saudis, the Japanese, the Chinese, the day traders, or the program trading algorithms that were moving the market.
The implication here is that the manager made the right moves, only to be undone by the uncontrollable and unpredictable moves of "those guys." Not surprisingly, this is a popular excuse among individual investors as well; it's never their fault that the stocks they picked failed, it was the nefarious dealings of hedge funds, short-sellers, pumpers, journalists and so on.
Nobody Could Have Known
One of the most common excuses that mortgage bond managers used during the collapse of the housing bubble was that the events that were occurring in the market were so unbelievably rare that no manager could have foreseen them. According to this line of thinking, their models said that the meltdown of the credit markets was a "once in a billion years" event, even though housing prices were at all-time highs, affordability was at all-time lows, personal debt levels were soaring and so on.
These excuses come up all the time; they were used during the collapse of the tech bubble and have been used in almost every post-bubble meltdown that has occurred in the markets. Apparently these models have difficulty factoring in the old homily "easy come, easy go." On a smaller scale, this also frequently happens with individual companies; arguably the most common word to go with "earnings" is "surprise" and managers will frequently blame so-called earnings surprises from portfolio companies as an excuse for their performance (while happily taking credit for the surprises that happen to go their way).
It's Not Me, It's You
Arguably the worst of the worst are those managers who defend themselves by attacking you. When confronted with poor performance, these managers will quickly reach for their files and show you where you signed documents attesting that you understood the risks involved, that there were no performance guarantees and that you agreed to have your funds managed as they saw fit.
Along these same lines, less reputable managers may try to blame you for their failings, pointing to "arbitrary" restrictions in their mandates that kept them from investing your money better. According to this line of thinking, the manager could have prevented your losses if only you allowed him or her to invest in other asset classes or investment types.
Closely related to this are those managers who will blame clients for withdrawing their money in the face of huge losses. While it is true that a sudden spate of redemptions can force asset managers to dump illiquid assets at unattractive prices, it is nevertheless poor practice to blame an investor for protecting him or herself from further losses at the hands of an underperforming manager.
The Bottom Line
The best excuses for investors are no excuses at all - investors should seek out those managers who speak with candor about their performance in both good times and bad. While it may be impractical for a manager to explain every aspect of their investment process, they should at a minimum clearly explain how their discretionary actions impacted results.
At no point should investors feel responsible for their manager's mistakes, nor should they accept the premise that the manager was helpless to adapt to changing market conditions. While no manager will be perfect and make only correct calls, reliable managers show themselves in the tough times by speaking frankly about their mistakes and taking responsibility for their performance.