I have never been a strong believer in the notion that a fund manager should invest their clients’ assets ‘as if it were their own money’. It is a neat heuristic that I am not sure works consistently in practice. The reality is that there is likely to be a gap between a fund manager’s personal and professional investments, and that difference can tell us a lot about an investor and the environment they operate within.

If we assume consistent objectives, why would a professional investor run their own portfolio in a manner that is different from their clients’? Primarily, because the constraints are distinct. By this, I don’t mean formal aspects such as the range of available assets or fees (although these do matter), but rather the informal restrictions that shape investor behaviour and decision-making. Constraints have a huge impact on investment outcomes but are typically ignored or hidden.

Let’s say a fund manager runs their own portfolio and also a fund for a large asset manager; the goal of both is to generate a 3% real return over 10 years. Why might the approaches be different?

Career risk: The most obvious driver is the spectre of career risk. Professional investors are optimising for two things: delivering on the objectives of their fund over time and keeping their job while they attempt it. Three years of underperformance doesn’t matter for a fund manager’s personal portfolio, but it could matter a great deal for their career. The influence of this factor will depend heavily on the individual.

Keeping their clients invested: While managing career risk may seem like a rational but somewhat self-serving endeavour, there is a closely related behaviour whereby a fund manager adopts a different approach for their clients in an effort to keep them invested. There is no point in having a great investment strategy that nobody can stick with. An investment approach that can deliver 15% annualised over 10 years, but will at some point underperform by 30% over three years, could be ideal for their personal portfolio; it is just that their fund might not have many assets left at the end of the 10 years. Professional investors should seek to run money in a way that keeps clients invested (for the right reasons).

Team over individual: Most professional investors work in teams. The investment process adopted and decisions made are the result of interactions within that group, rather than a reflection of one individual’s ideas. When a fund manager invests for themselves, they can pay attention to, or ignore, their colleagues as much as they wish. It is reasonable to assume that we will overweight the value of our own opinions.

Living through outcomes: Nobody has to live through the short-run outcomes of their personal investments; we can check our portfolios as infrequently as we like. When fund managers make decisions professionally, however, they have to experience those outcomes on a daily basis and are subject to constant scrutiny. Even if they have a resolute belief that an underperforming investment idea will work over the long run, this conviction might be tempered if they have to justify it to a committee every quarter. The emotional toll can be heavy and one that many people would rather avoid.

Managing for the collective: When a fund manager makes investment decisions for their own portfolio, they are doing so with ‘perfect’ knowledge of the person they are investing for and to whom they are accountable. That is entirely different when those decisions are being made for a sizeable, largely unknown and diverse group of people. Managing for the collective is different from running money according to your own personal circumstances and views.

Norms and conventions: Personal portfolios are unseen, so there is absolute freedom to take decisions that may seem odd, anomalous or imprudent relative to industry conventions. This could lead to value-creating liberation or some unmitigated disasters (which clients may be spared)

—

It is easy to assume that the constraints creating a gap between how a professional investor runs their own money and their funds are negative for clients – as if they are receiving an impaired version of a ‘pure’ investment strategy. I don’t think this is always the case. While some constraints can be an impediment, others can serve as an effective limit on sometimes erratic or self-centred individual behaviour.

There is no blanket answer as to whether a gap between personal and professional investment is positive or negative; it is simply important to understand whether it exists and why.

—

—

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).

As we are currently in the midst of a wonderful summer of sport, I was considering writing a post about the factors which make some sports boring to watch and others exciting.* I am not, however, brave enough to put my head above the parapet on that subject quite yet. Instead, I decided to write about some vivid human behaviours that arise when we are watching the World Cup, all of which should feel very familiar to investors:

– Extrapolation: We can’t help but believe that what has happened in the past will continue into the future.

All it takes is one England victory and we are immediately checking our wall chart / bracket (delete based on age / location) to see who we will be playing in the final. 

– Momentum matters: Positive or negative progress can become self-perpetuating and an incredibly powerful force.

The wretched hydration breaks and their impact on World Cup games are a great example of how vital momentum is in many walks of life, and how significant interrupting it can be.

– We are overconfident: We all think we are better than we are.

We know more about what England’s starting XI and optimal tactical approach should be than their manager who has deep knowledge of the players and has won nine major trophies in nearly 17 years. 

– Emotions dominate everything: The judgments we make are often overwhelmed by how we feel.

As Paul Slovic highlighted when discussing the affect heuristic – when we feel emotional about something we lose sight of any nuance or reasonable perspective about it. We will see this in stark contrast when people react to England being knocked out (if, indeed, they are).

– Selective perception: We see everything through our own, partial lens.

If a player on your team suffers a potential foul in the area, then it is a certain penalty; if your team commits exactly the same offence at the other end it is absolutely not a penalty, and probably a dive.

– Narrative fallacy: Where there is randomness and chaos, we see compelling stories.

There will be some wonderful stories throughout this World Cup, and many of them will involve far more luck and fortune than anyone will be willing to acknowledge.  

– Halo effect / attribution error: We neglect the role of systems or chance, and focus on the impact of individuals.

We don’t want World Cup wins to be about teams, rather we want to put success or failure down to identifiable, individual agency – whether it is Mbappe driving France towards another title, or Ronaldo being responsible for Portugal’s lacklustre start. 

– Incentives matter: Most decisions are driven by the incentives of those who hold the power.

See: FIFA.

—

Sometimes it is hard to get across behavioural investing concepts amidst the complexity of financial markets, but all of the same issues occur in sport and will be vividly apparent during the 104 games of the World Cup. Keep an eye out.

—

* As a sneak peek, exciting sports (in my opinion) have high and persistent levels of jeopardy, but more on that another time.

—

---

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.

There has been plenty of talk about elevated levels of market uncertainty this year, but until very recently equities have been contradicting this notion. When markets are exhibiting pronounced levels of dispersion driven by a singular theme – in this case AI – it is a sign of conviction rather than doubt. Yet the extreme moves we have witnessed seem like an exaggeration of the level of confidence anyone can have about how the future unfolds.

There are many excellent examples of the intense equity market dispersion that has occurred. It might be the crushing outperformance of momentum versus quality stocks, TSMC holding a substantially higher weight in emerging market indices than India, or more than 50% of the Korean market being made up by two companies. It seems fair to say that the AI trade has been running extremely hot.

The problem with the ferocity of the move in names within the AI eco-system is that it seems misaligned with the vast number of unanswered questions about the longer term impact of AI on markets and the economy.

Here are a few that spring to mind that I don’t have confident answers to, and I doubt anyone does:

– What level of ROI are companies seeing from AI implementation?

– What levels of ROI are companies hoping to deliver in the future from an AI rollout?

– How much are companies willing to pay for tokens when subsidies are reduced?

– What is the moat on an LLM? How do they ‘sustain’ high margins if their only edge is time to market?

– If AI is to be genuinely transformative, why were the corporate users of AI being left behind in the rally?

There are many more questions without clear resolution, and the dramatic level of market dispersion seems at odds with the profound uncertainties ahead.

This is not to say that the most bullish base case is wrong, rather that the probability of it occurring is not 100%.

Of course, I am being a little naïve here. The market conditions we witnessed in recent months had little to do with fundamentals or probabilistic nuance, and much to do with thematic performance chasing driven by an incredibly powerful narrative. Although there has been some respite in recent days, if that environment resumes the danger is that performance pressure eventually drags everyone in.

In times such as these the market becomes starkly binary. The questions are: is the rally justified or not? Is AI in a bubble? Are software company models irrevocably broken?

This is unhelpful and dangerous. The future is messy, complicated and uncertain, that is always the case – even if markets seem to be telling us otherwise. The most important question to answer remains this: am I appropriately diversified given all that I can’t possibly know?

—

---

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.

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.

—

---

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.