Key Research

We believe that identifying truly skilled managers who will beat their benchmarks is highly labor intensive and requires a great deal of skill, experience, and judgment. We further acknowledge that the average active manager will underperform his or her benchmark as a result of expenses and transaction costs. However, using active managers does not require that we use the entire universe of active managers or that we use the average active manager. To add value, we only have to be able to identify a small number of skilled managers. We can set a very high bar where—if we can’t identify a manager in whom we have high confidence in their ability to outperform a benchmark going forward—we can instead use an index or index alternative. The due diligence approach we employ in selecting managers is based on this very high hurdle. We are seeking to identify not only skill, but also whether there are areas of uncertainty that have the potential to erode our confidence. Our goal is to own only those managers where our confidence is very high and the uncertainties are very low.  READ MORE

By and large, both investors and fund professionals rely heavily on past performance in their fund selection process. The problem is that past performance is of little use in identifying funds or managers who will deliver superior future performance relative to their peer group. Numerous studies have failed to unearth a significant positive correlation between past relative performance and future relative performance. The only correlation found has been the consistency of managers with very bad returns to continue to post bad returns in the future.  READ MORE

Litman Gregory’s approach to fund research recognizes that past performance is useful only as a tool for screening funds to identify those that may be worthy of further research. Value added comes from identifying why a fund performed well in the past, determining if the portfolio management team has an identifiable edge (i.e., do we think the past performance was due to luck or skill), and assessing whether the edge (if one exists) is sustainable. To answer these questions requires intensive firsthand contact with fund managers and their research teams. Our due diligence process is time-consuming and labor-intensive, and our goal is to select managers with an identifiable edge that we are highly confident can be maintained. We’ve found that successful managers with a sustainable edge often possess common characteristics.  READ MORE

Adversity has a way of revealing strengths and weaknesses, and this is certainly true among financial advisors. The recent meltdown was tough enough for even the most seasoned professionals, but for those who lacked a clear underlying investment philosophy, the devastating sequence of events that began in 2008 effectively deprogrammed them from whatever belief system they had and left them searching for a new "religion" to believe in—one they could report to unhappy clients was more likely to work in this "new world."  READ MORE