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UBS Global Asset Management Advises: Performance Chasing Leads to Failure
Regional Chief Investment Officer Brian Singer says investors perform worse than their own investments. In an investor culture obsessed with "beating the market," investors not only underperform the market, they also underperform their own investments, according to Brian Singer, Regional Chief Investment Officer, Americas, and Head of the Global Investment Solutions (GIS) team for UBS Global Asset Management.
Research conducted by UBS Global Asset Management shows that individual investors tend to focus more on performance and less on disciplined portfolio construction, the latter of which is a greater determinant of long-term investing success, Singer writes in the First Quarter 2007 edition of Current Perspectives, UBS Global Asset Management's investment newsletter. And while institutional investors apply much greater discipline to their investment processes, they do often follow their own form of performance-chasing, particularly in seeking "alpha," or returns uncorrelated to a benchmark.
As a result, investment performance (the stated return, over a block of time, of a portfolio) and investor performance (the return an investor actually earns over that period) can be quite different, according to the research conducted by UBS Global Asset Management.
In fact, the average individual investor often seems to obtain much lower returns than do his actual investments. "The key to real-life underperformance is not what the investments did, but what the investor did," says Singer. "In other words, the key variable appears to be how investors behave: when and why they bought and sold investments."
On the institutional side, Singer notes: "Unfortunately, institutional investors too often use three years of strong performance to signal a hire of an asset manager and, more egregiously, three years of weak performance to place a manager on a watch list or to signal a fire."
Singer suggests that the best offense may be a good defense and advises investors to:
Create an outcome-oriented neutral portfolio allocation, based either on the investor's risk tolerance or liability needs, or both
Adopt a theoretically sound core set of investment beliefs and stick to them
Appropriately define, understand, measure and manage risk
Not rely too much on historical performance, especially observed over short periods of time.
The views of Brian Singer and the GIS team are contained in the latest issue of "Current Perspectives," a quarterly publication of UBS Global Asset Management. The document may be found at www.ubs.com/globalam-us.
The views expressed in Current Perspectives are as of December 31, 2006, and are those of UBS Global Asset Management. These views are subject to change at any time in response to changing circumstances in the markets, and are not intended to predict or guarantee the future performance of any individual security, asset class, the markets generally, nor are they intended to predict the future performance of any UBS Global Asset Management account, portfolio or fund. The information contained herein does not constitute a distribution, an offer to sell, or the solicitation of an offer to buy securities or funds.
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Karina Byrne Tel. +212-882-5692
New York, February, 7, 2007