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The Risks of Chasing Top Fund Managers

By February 21, 2026No Comments

The Risks of Chasing Top Fund Managers

For many investors, the temptation to invest with last year’s top-performing fund manager is hard to resist. After all, if someone has recently beaten the market by a wide margin, it’s natural to assume they’ve found a formula for success that can be repeated. Unfortunately, the data shows this assumption rarely holds up over time. Chasing performance is one of the most common – and most costly – behavioural mistakes investors make.

Why Top Managers Rarely Stay on Top

Investment returns are influenced by countless factors – many of which are outside a manager’s control. Short-term outperformance often owes more to luck or market conditions than to repeatable skill. Even highly skilled managers can experience long periods of underperformance due to their investment style falling out of favour or simply because the markets are unpredictable.

Studies tracking mutual fund performance consistently find that the majority of funds that land in the top quartile in one period fail to repeat that performance in the next. Instead, leadership positions often rotate as different market segments perform better or worse over time.

The Dimensional Evidence

Dimensional Fund Advisors has illustrated this vividly in their analysis of the largest U.S. stocks over rolling periods. Their chart, ‘Think Twice About Chasing the Biggest Stocks,’ shows how frequently the biggest names fall out of the top rankings – and how unpredictable the turnover can be

https://my.dimensional.com/one-pagers/think-twice-about-chasing-the-biggest-stocks

This same principle applies to fund managers: the factors that propelled them to the top may not persist, and attempting to time your investments based on who’s ‘hot’ today is a gamble, not a strategy.

Practical Takeaways

  1. Focus on process, not recent performance. Look for evidence of a disciplined, repeatable investment approach rather than short-term results.
  2. Diversify across managers, asset classes, and strategies. Concentrating too much in a single style or star manager increases the risk of extended underperformance.
  3. Remember that costs matter. Even if a manager can generate some excess return, high fees can erode or eliminate that advantage over time.
  4. Have a written investment policy and stick to it. This can help prevent emotionally driven decisions like chasing performance.

Academic Perspective

The persistence of fund manager outperformance has been studied extensively in academic finance literature. While there is some evidence that a small subset of managers demonstrate skill beyond what would be expected by chance, the vast majority do not consistently beat their benchmarks after accounting for fees, taxes, and trading costs.

Seminal studies by Carhart (1997) and others have shown that much of what appears to be persistent outperformance can be explained by exposure to common risk factors – such as market, size, value, and momentum – rather than manager-specific skill. Once these factor exposures are controlled for, the alpha (excess return) generated by most managers is statistically indistinguishable from zero

– “There is no evidence that the best-performing funds in one period persistently outperform in future periods, once risk and costs are considered.” (Carhart 1997)

This research supports the view that investors are generally better served by focusing on broad diversification, low costs, and disciplined rebalancing rather than trying to identify and chase the next top-performing fund manager.

– “Most funds do not have enough skill to overcome the costs they charge. The results suggest that good performance by most funds is more luck than skill.” (Fama & French 2010)

Disclosures:
Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Unit values and investment returns will fluctuate.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.

References:

Stick to a plan. Stay diversified. Keep costs low. Avoid the noise.

And remember: boring investing is often the most effective.

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Article Author

Tanner Hassell, BBA, CFP®, CIM

Certified Financial Planner®
250-718-7232 ext. 113

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Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Unit values and investment returns will fluctuate. Investment strategies discussed may not be suitable for all investors. Investment decisions should be based on individual objectives, risk tolerance, time horizon, and financial circumstances.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.