Manager Pairings to Counter Periodic Underperformance

“In this world, nothing can be said to be certain, except death and taxes”

– Benjamin Franklin

… “and your investment manager hitting a patch of underperformance”

– LPL Research (only partly in jest)

According to our latest study of active management, 96% of active U.S. equity mutual funds with a 10-year record had at least one three-year period of underperformance relative to their assigned benchmark at some point over the last 10 years. This same set of funds outperformed in roughly half (47%) of the periods. So, while active management was not poor overall, and pockets of strong performance occurred, it has been extremely difficult for any given manager to never underperform.

One strategy for dealing with the near-inevitability of manager underperformance is manager pairings. Even within a particular equity asset class, such as large cap growth, it may be prudent to utilize two funds or managers. The basic logic is as follows.

• Identify two investment managers believed to offer outperformance potential over a full market cycle. This may be based upon historical tendencies and a going-forward assessment of whether the historical patterns are expected to persist.
• Identify the points in time when each manager has tended to perform particularly well or poorly. Even if a manager has not underperformed during its existing history, it is still important to anticipate adverse market environments that may cause future underperformance.
• Determine the allocation to each manager in the pairing. This could be a simple 50/50 blend or include a tilt towards a manager in which the investor is more confident or expects to be more consistent.

A Tale of Two Funds or Managers

The chart titled “Rolling Three-year Excess Returns versus Benchmark” shows rolling three-year excess returns for two hypothetical funds or managers. Excess return is simply the return of the investment minus the return of the benchmark index. Plots above zero indicate periods when the investment is outperforming, and plots below zero indicate periods of underperformance.

• Fund or Manager A (shown with a blue line) is a hypothetical active investment portfolio with a solid track record, outperforming its benchmark index in 68% of the rolling three-year periods over the last 10 years. Still, it had periods of underperformance, including the three-year periods ending in 2018–2020 and the most recent three-year periods.
• Fund or Manager B (orange line) is a hypothetical active investment portfolio with a solid track record, outperforming its benchmark index in 58% of the rolling three-year periods over the last 10 years. Its underperformance occurred in the three-year periods ending in 2016 and 2017, as well as in 2022–2024.
• The second chart, titled “Rolling Three-year Excess Returns of a 50/50 Blend,” shows the hypothetical performance of pairing Manager A and Manager B in equal allocations. The hypothetical blend has increased the consistency of relative performance, with the pairing outperforming the benchmark in 95% of time periods.

Rolling Three-Year Excess Returns versus Benchmark

A hypothetical illustration

Source: LPL Research 03/31/26.
Disclosure: This is a hypothetical illustration, not the actual performance of a particular investment.

Rolling Three-Year Excess Returns of a 50/50 Blend

A hypothetical illustration

Source: LPL Research 03/31/26.
Disclosures: This is a hypothetical illustration, not the actual performance of a particular investment. The investments were rebalanced back to a 50/50 weighting on a quarterly basis.

Why Good Managers Have Pockets of Bad Performance

• A manager may emphasize securities of a certain type that have gone out of favor with investors, such as high-quality stocks during a low-quality rally or deep value stocks during a growth stock rally.
• They may take less risk than the index, underperforming during sharply advancing market environments.
• Ineffective stock selection. For a period of time, they may simply have chosen stocks that have underperformed those present in the benchmark index.

The Upshot

Some investors may question the merits of having two managers in the same asset class instead of picking one favorite manager. Even a manager with a strong performance record can be expected to have periods of difficulty outperforming the benchmark. Rather than putting all our eggs in that manager’s basket, we can attempt to anticipate times when that manager may struggle and select a complementary manager whose returns may “zig” when the other manager “zags.” If the investor expects both managers to outperform over a full market cycle, adding a second strong-performing manager may not necessarily reduce long-term returns. By pairing two managers together in the same asset class, investors may potentially benefit in these important ways:

• Increase the consistency of relative performance
• Reduce volatility
• Lessen the temptation of selling an underperforming manager that may be poised for a recovery