NEW YORK (TheStreet) -- There is a concept in the investment community that is discussed primarily behind closed doors: underperformance. Whether a manager is underperforming his benchmark (like the S&P 500) or his peers (think hedgies like Einhorn, Ackman, Loeb, Paulson, etc.), believe me he is paying attention.
If that underperformance becomes dramatic -- regardless of what he's saying in shareholder letters or interviews -- you had better believe he is getting nervous.
Money managers the world over have different conversations with their clients (or shareholders/investors) than they do with their colleagues. This shouldn't come as a complete surprise. But are discipline and decision-making ever affected during periods of underperformance?
Case in point is 2013. We all know the stock market (S&P 500) was up about 30% last year, with a fairly good-sized hiccup during June's unexpected and severe rate spike. Can you name a single manager or fund that beat the S&P 500 last year? I can't. None of our client portfolios beat the S&P last year -- and we make no apologies for that fact.
But a real mistake might have been to try and "catch up" by taking on more risk at the beginning of 2014. The news flow was all positive coming into the new year and it would have been understandable (sort of) to open the year by applying pressure to the gas pedal instead of the brake. But the result would have been adding exposure to all the asset classes that got whacked hardest in January's mini-correction: Small-caps (iShares Russell 2000 Index (IWM) lost 7.3%), emerging markets (Vanguard FTSE Emerging Markets ETF (VWO) lost 7.9%) or even just the S&P 500 (which lost 5.6%).
"Three tomatoes are walkin' down the street.
Papa Tomato, Mama Tomato and Baby Tomato.
Baby Tomato starts lagging behind, and Papa Tomato gets really angry.
Goes back and squishes him and says: Ketchup."
- Pulp Fiction
Instead, and against the conventional wisdom that insisted interest rates would move higher, we maintained the allocations with which we closed out 2013. The result has been some fairly nice outperformance.