Falling in Love with a Fund: When Multi-Manager Conviction Becomes a Client Problem

Every multi-manager needs conviction. Without it, a portfolio risks becoming little more than an expensive benchmark proxy. Active management requires judgement, patience and a willingness to look different.

But conviction has a dangerous cousin: attachment.

A fund can begin as a well-researched allocation and slowly become something else — a favourite idea, a long-standing relationship, a philosophical anchor, or a position the manager no longer judges with full objectivity. That is what we might call falling in love with a fund.

The issue is not whether an underlying manager underperforms. All active managers underperform at times. The real issue is whether a multi-manager continues to hold significant underperforming allocations with unwavering faith, even when those holdings are dragging down the overall fund outcome.

At that point, patience can become a client problem.

And not only for the end investor.

When a multi-manager disappoints, the client feels the financial pain. They see lower returns, weaker compounding, delayed goals, reduced confidence and uncomfortable conversations about why their portfolio has lagged. But the adviser feels a different kind of pain. They are the one sitting across the table, explaining the outcome. They are the one who recommended the fund. They are the one whose judgement is quietly being reassessed by the client.

The client loses performance. The adviser loses faith.

That is why persistent underperformance in a multi-manager fund should not be treated as a purely academic issue. It is commercial, behavioural and relational. It affects the client’s wealth, but it also affects the adviser’s confidence in the solution they selected.

Academic work gives us a useful starting point. Sharpe’s arithmetic of active management reminds us that, before costs, the average active investor must earn the market return; after costs, the average active investor must lag. Carhart’s work on mutual fund persistence found that much apparent outperformance could be explained by common factors, expenses and transaction costs. Fama and French later argued that few active funds delivered benchmark-adjusted expected returns sufficient to cover their costs.

This does not mean active management cannot work. It means active management must earn its place.

That is especially important in multi-manager funds. A multi-manager is not simply employed to collect talented underlying funds. The role is broader: manager selection, asset allocation, style balance, risk control, cost discipline and final client outcome. Investors do not experience each holding in isolation. They experience the total portfolio, after all costs and all decisions.

This is why significant underperforming allocations deserve scrutiny. A small satellite position can be tolerated for longer. A major allocation is different. If a 10%, 15% or 20% holding persistently detracts, it is no longer a minor research error. It is a portfolio-level decision repeatedly renewed.

The manager may say: “We are right; the market is wrong.”

Sometimes that may be true. Markets can misprice assets. Sentiment can overwhelm fundamentals. Good managers occasionally have to withstand painful periods before a thesis is rewarded.

But the old market maxim applies: markets can remain irrational for longer than investors can remain solvent.

For clients, “solvent” does not only mean avoiding financial ruin. It means preserving confidence, compounding, time horizon, withdrawal plans and opportunity cost. A manager may eventually be proved right, but if clients have lost years of relative return waiting for vindication, the practical outcome may still be poor.

For advisers, the issue is equally real. How long should they continue defending a fund whose process sounds compelling, but whose outcome keeps disappointing? How many review meetings can be spent explaining that the thesis remains intact, while the client’s lived experience says otherwise? At what point does patience with the fund become risk to the adviser’s own proposition?

Being early can look very similar to being wrong.

Behavioural finance helps explain the danger. Kahneman and Tversky showed how losses distort decision-making. Samuelson and Zeckhauser identified status quo bias. Arkes and Blumer explored the sunk-cost effect. Staw’s work on escalation of commitment showed how decision-makers can continue backing a failing course of action partly because abandoning it would mean admitting the earlier decision was wrong.

Professional allocators are not immune. A multi-manager may retain an underperforming fund because selling it crystallises a mistake. They may overvalue familiarity, defend an old thesis, or search for confirming evidence while discounting contrary data.

This is where conviction turns into attachment.

Good discipline is not frantic trading. It is not firing every manager after a difficult quarter. It is conditional patience. It means knowing why a fund is owned, what role it plays, what evidence would challenge the thesis, and whether the position still deserves its capital today.

A multi-manager should be willing to say: “This fund is underperforming, but in a way we expected, within a risk budget we accepted, and for reasons that remain consistent with the portfolio objective.”

But they should also be willing to say: “The evidence has changed. The fund has not done the job we expected. There are better uses of capital.”

That second sentence is often the harder one. It may also be the more valuable one.

The FCA’s Assessment of Value regime reinforced an important principle: value is not proven merely because a fund has produced a positive return. A fund can rise in a rising market and still fail to deliver good value if it lags reasonable comparators, charges too much, or fails to meet its stated objective. If simplified reporting leaves advisers with less public detail, the need for direct scrutiny does not fall. It rises.

At Qualis, we believe multi-manager investing should be evidence-led, portfolio-aware and outcome-focused. Conviction matters, but it must remain open to challenge. Significant allocations must earn their place. Underperformance must be explained, not excused. And loyalty should belong to the client outcome, not to yesterday’s research note.

For advisers, this is not about second-guessing every holding. It is about protecting the integrity of the client recommendation. If a multi-manager is still allocating capital intelligently, it should welcome scrutiny. If it is simply remaining faithful to a fund or thesis it once loved, advisers should be prepared to act.

Because the client receives the return, not the story.

This article is for information only and does not constitute investment advice or a personal recommendation. Capital is at risk, and the value of investments can fall as well as rise.

Bibliography –

Arkes, H.R. and Blumer, C. (1985) ‘The psychology of sunk cost’, Organizational Behavior and Human Decision Processes, 35(1), pp. 124–140. doi: 10.1016/0749-5978(85)90049-4.

Carhart, M.M. (1997) ‘On persistence in mutual fund performance’, The Journal of Finance, 52(1), pp. 57–82. doi: 10.1111/j.1540-6261.1997.tb03808.x.

Fama, E.F. and French, K.R. (2010) ‘Luck versus skill in the cross-section of mutual fund returns’, The Journal of Finance, 65(5), pp. 1915–1947. doi: 10.1111/j.1540-6261.2010.01598.x.

Kahneman, D. and Tversky, A. (1979) ‘Prospect theory: An analysis of decision under risk’, Econometrica, 47(2), pp. 263–291. doi: 10.2307/1914185.

Samuelson, W. and Zeckhauser, R. (1988) ‘Status quo bias in decision making’, Journal of Risk and Uncertainty, 1(1), pp. 7–59. doi: 10.1007/BF00055564.

Sharpe, W.F. (1991) ‘The arithmetic of active management’, Financial Analysts Journal, 47(1), pp. 7–9. doi: 10.2469/faj.v47.n1.7.

Staw, B.M. (1976) ‘Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action’, Organizational Behavior and Human Performance, 16(1), pp. 27–44. doi: 10.1016/0030-5073(76)90005-2.