How do you deal with underperformance?

Philippe Desfossés

• Location: Paris 
• Assets: €20bn
• Membership: 4.5m
• Mandatory pension fund for French civil servants

”In itself, underperformance or outperformance of a strategy does not mean much; it depends on the reasons behind it. 

Firstly, assessing the performance of a strategy depends on the kind of benchmark you are using. If you are using a market-cap benchmark, maybe the outperformance of your asset manager is just the hidden risk you’re taking –without being conscious of it – by surfing on top of a gigantic wave. As we know, at some point bubbles do explode, and that is when your outperformance may become an underperformance. 

The assessment also depends on the timespan you use. For a long-term investor such as a pension fund, with liabilitiy duration that can reach 20 to 30 years, does it make sense to assess performance on a yearly basis?

We give our asset managers time and do not make rushed decisions to terminate a mandate just because there has been one year of underperformance. 

At some point, if an asset manager is underperforming constantly it may become necessary to send tha manager a message, which can be a withdrawal of funds. If the performance remains poor, it might be time to discuss putting an end to that mandate.

Our trustees accept that an investment strategy may underperform in the short term. For this reason, they have been instrumental in the adoption of our SRI charter. All the assets we invest in are selected only after they have passed through our SRI grid, which comprises 45 criteria for stocks. 

The trustees know that this approach may lead to greater tracking error, especially if compared with approaches that follow more traditional rules, such as not being too removed from the benchmark. 

So far, we have yet to come across a mandate underperforming to the point where it would have become necessary to react.”