I recently read an article about another high-profile ‘star’ fund manager whose performance had been flagging severely. You can probably guess who it was, but that is irrelevant. What matters is the depressingly repetitive pattern of fund managers being lauded as geniuses after a spell of strong returns and dismissed as frauds when gravity brings those returns back to earth. This dramatic shift in sentiment is symptomatic of how most active fund investing works, and it is an almost sure path to failure.

The comments beneath the piece lamenting the latest star fund manager’s downturn were inevitably vitriolic. Here is a sample:

“A has-been definitely proves he is a has-been.”

“Finally exposed.”

“Poor excuses for poor decisions.”

“It was a complete open goal in 2025. Any fool could have made money.”

“Having endured years of presentations from active fund managers, I can confirm that the only real skill they possess is selling snake oil.”

Although I wasn’t surprised by the tone, it did jar with the universally positive perspectives I was sure I had read about this very same fund manager when their relative performance was a little healthier. I looked at the comments responding to a far more positive article from 2021:

“An absolute legend who deserves every penny.”

“Great man – and a great team.”

“Fantastic and fully deserved. May you have many successful years ahead.”

“Great guy. I’m heavily invested. Worth every penny. Those who say he isn’t simply aren’t good at valuing his contribution. Their loss.”

In the space of five years the fund manager has gone from investing genius to greedy and incompetent. I spent years having to justify why I hadn’t invested in this particular manager and was apparently a fool to be missing out on such an obvious winner. Now everyone says they knew all along it wouldn’t last.

Neither of these binary perspectives is true, but they do perfectly represent how most people seem to approach investing in active funds: find the funds that have generated the strongest performance over three to five years, latch onto the narratives that have built up around either the manager or their investment style, and then sit tight for mean reversion to take hold.

It is hard to overstate what a terrible approach to investing this is, yet it is accepted practice across every part of the industry.

All high-conviction actively managed funds will experience prolonged spells of outperformance and underperformance – and by prolonged, I mean years. This is entirely irrespective of whether the manager possesses genuine skill or edge. If a fund is enjoying an unusually strong period of relative returns, it is almost inevitable that leaner times lie ahead, even if the timing is uncertain. Yet each time it happens we act as though we have never witnessed it before.

There is no process, no matter how robust, that works in all environments and at all times.

The endemic performance chasing in the active fund industry is driven by two powerful behaviours: outcome bias and extrapolation. With outcome bias we judge the quality of a process – or a fund manager – purely by the results delivered, which in a noisy system is an incredibly dangerous assumption to make. Extrapolation compounds this. When a fund manager is outperforming, not only is their investing ability considered unimpeachable, we cannot see any end to those high returns.

When a previously high-flying manager begins to struggle, the same outcome bias that gave us such conviction in their acumen now leads us to spot weaknesses in the process. It becomes easy to identify changes in approach and construct plausible-sounding reasons why returns have deteriorated so sharply. The last thing we want is to acknowledge our own failings, or accept that we misjudged the inherent cyclicality of fund manager returns. Instead, we have to build a compelling case for why things outside our control have changed, and why we need to sell.

One of the most frustrating features of this hire-and-fire culture is that we treat each high-profile case as a unique instance with its own particular circumstances. Yet it is the same pattern repeating. It is about our behaviour far more than the capabilities of any individual fund manager.

Few of us readily admit to performance chasing when selecting funds. We always construct persuasive stories justifying our decisions and explaining why historic returns were incidental to the choices we made. It is just a coincidence that, if you know a fund’s past performance, you can almost perfectly predict the outcome of any research carried out on it. It is not merely that we don’t want to admit it – we are genuinely wired to find a good process behind good outcomes, and a flawed one behind poor outcomes.

Even investors who sincerely try to avoid performance chasing find it extraordinarily difficult when it is such a powerful industry norm. Everyone is happy when you sell a struggling fund or buy into one topping the performance charts, despite the evidence suggesting that this is unlikely to be a good idea.

If you want to invest in high-conviction active funds with genuinely differentiated returns, you need to do three things: identify a manager with real skill or edge; be willing to sit through potentially years of underperformance even when you believe in that skill; and develop the ability to distinguish between cyclical underperformance and a genuine deterioration of process. None of these is easy.

The good news is that there is no obligation to do any of it. Index or diversified systematic funds remain a perfectly sensible option and a far better one than investing in high conviction active funds with wholly unreasonable expectations. If you do want to identify skilled, differentiated active managers, it is extraordinarily hard to do well, made significantly harder by a set of very human behaviours. To have a chance of succeeding you need to approach it very differently. Or not do it at all.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).

All opinions are my own, not that of my employer or anybody else. I am often wrong, and my future self will disagree with my present self at some point. Not investment advice.