I have a confession to make. I spend less time reading asset management reviews than most people think I should. Clients often send me glowing reports or top-rated lists, asking if a particular firm is the key to unlocking market-beating returns. My answer is always the same. These reviews measure something, but it is rarely a predictor of your future wealth. The disconnect between the world of reviews and the reality of investor returns is vast. Today, I want to explore that gap with you.
Table of Contents
What Are We Even Reviewing? Defining the Terms
We must first separate two distinct concepts.
Asset Management Reviews are evaluations of a firm or a specific fund. They come from rating agencies like Morningstar, financial news outlets, and wealth advisors. They analyze factors like:
- Performance: Past returns against a benchmark and peer group.
- Process: The investment philosophy and strategy.
- People: The experience and stability of the portfolio management team.
- Parent: The strength and ethics of the fund company.
- Price: The fund’s expense ratio and other fees.
A high rating, like a Morningstar 5-star rating, is a retrospective award. It looks backward. It says a fund has performed well relative to its peers, after adjusting for risk, over a specific period.
Mutual Fund Investing Returns are the actual dollars you earn or lose in your brokerage account. This is your personal outcome. It seems logical that a 5-star fund would lead to a 5-star personal return. The data, however, shows this is often not the case.
The Chasm Between Theory and Practice: The Behavior Gap
A fund’s published returns assume a perfect buy-and-hold strategy. They calculate returns from a single starting point to a single ending point. Your returns, however, are determined by your behavior.
You might buy after a period of strong performance (chasing returns). You might panic and sell during a market downturn (locking in losses). You might trade in and out, trying to time the market. This difference between a fund’s reported return and the average investor’s actual return in that same fund is called the “behavior gap.”
Studies by firms like Dalbar Inc. consistently show this gap is massive. The average investor significantly underperforms the very funds they invest in, not because the funds are bad, but because of emotional decision-making. A 5-star rating does not immunize you from poor behavior.
The Math of Timing: A Simple Example
Let’s make this concrete. Imagine a fund, “Steady Growth Fund,” has a stellar five-year run. Its annual returns are: +8%, +15%, +30%, -10%, +5%.
The fund’s published 5-year average annual return is calculated using the geometric mean, which accounts for compounding:
\text{Geometric Mean} = [(1 + r_1) \times (1 + r_2) \times (1 + r_3) \times (1 + r_4) \times (1 + r_5)]^{1/5} - 1
Plugging in the returns:
[(1.08) \times (1.15) \times (1.30) \times (0.90) \times (1.05)]^{1/5} - 1 \approx 1.089 - 1 = 0.089
or 8.9% per year.
Now, imagine two investors:
- Investor A: Buys and holds for the entire five years. They earn the published 8.9% return.
- Investor B: Sees the great +30% return in Year 3 and buys in at the peak. They then panic after the -10% loss in Year 4 and sell. Their return is based on their specific timing.
This example shows how a fund’s review might highlight the 8.9% return, but an investor’s reality could be a loss.
What Reviews Are Good For (And What They’re Not)
This does not mean reviews are useless. They provide valuable data. I use them as a filtering tool, not a selection tool.
What Reviews Do Well:
- Identify Process and Philosophy: A review helps me understand how a manager invests. Is it a strict index tracker? A deep-value active manager? This tells me if the fund fits a specific role in a portfolio.
- Assess Cost: Reviews prominently feature expense ratios. This is one of the few reliable predictors of future relative performance. A low-cost fund has a better chance of outperforming a high-cost fund in the same category.
- Uncover Red Flags: A review can highlight manager turnover, strategy drift, or a sudden spike in assets that might make a strategy harder to execute.
What Reviews Do Poorly:
- Predict Future Returns: Past performance is not indicative of future results. This disclaimer is there for a reason. A 5-star rating is often a peak before a period of mean reversion.
- Measure Your Experience: A review cannot account for your personal tax situation, your investment timeline, or your emotional tolerance for risk.
| What It Measures | Asset Management Reviews | Your Personal Returns |
|---|---|---|
| Focus | The Fund’s Past Performance | Your Future Wealth |
| Key Metric | Stars, Performance vs. Benchmark | Your Actual Dollar Gain/Loss |
| Influence | Process, People, Price, Past Returns | Your Behavior, Timing, Taxes, Fees |
| Time Perspective | Retrospective | Real-Time and Forward-Looking |
A More Reliable Path: Process Over Performance
So, if we cannot rely on reviews to guarantee returns, what should we do? I advocate for a process-oriented approach.
- Emphasize Asset Allocation: Decades of academic research show that over 90% of your return variability is determined by your allocation to stocks, bonds, and other assets—not by picking the top-reviewed funds within those categories.
- Prioritize Low Costs: Expense ratios are a known variable. Choosing a low-cost index fund ensures you capture market returns with minimal drag. It is a deliberate, rational choice.
- Focus on Fit, Not Stars: Choose funds whose strategy and risk profile you understand and are comfortable holding for decades, not just until the next review cycle.
- Build a Plan and Stick to It: The most powerful tool you have is discipline. A boring, low-cost portfolio that you hold through market cycles will almost always outperform a portfolio of 5-star funds that you trade emotionally.
My Final Perspective
Asset management reviews offer a snapshot of the past. They are a useful tool for due diligence. But they are a terrible crystal ball. Your investing returns are not determined by a rating. They are built by your own actions—your ability to stay invested, control costs, and adhere to a smart, long-term plan.
Do not invest in a story written by a reviewer about yesterday’s winner. Invest in a process designed for your tomorrow. Allocate your assets wisely, minimize costs, and above all, manage your behavior. That is the ultimate review that matters. The one you write for your future self.
