What PMS Investors Should Understand About Long-Term Underperformance
Understand why PMS portfolios can underperform at times and how investors should interpret performance cycles.
Underperformance is uncomfortable. When your PMS portfolio trails the benchmark for months or even years, doubt creeps in. You question your choice of manager, wonder if you should switch, and face pressure from watching others seemingly do better.
Yet, understanding performance cycles is essential for PMS investors. The nature of concentrated, conviction-driven portfolios means periods of underperformance are not just possible but expected. How you respond during these periods often determines your ultimate investment success.
Why Underperformance Happens
PMS portfolios underperform for several reasons, most of which are structural:
- Concentrated portfolios: Holding 15-25 stocks means more volatility than diversified funds
- Style cycles: Value, growth, and quality investing rotate in and out of favour
- Sector tilts: Conviction in certain sectors can hurt when those sectors lag
- Cash positions: Holding cash during rallies causes short-term underperformance
These factors are features of active management, not bugs.
The Nature of Performance Cycles
Markets move in cycles, and investment styles follow their own rhythms. Value investing, for example, underperformed growth investing for much of the 2010s. Investors who abandoned value managers during this period often switched just before value began outperforming again.
PMS managers typically stick to their investment philosophy through cycles. This consistency is a strength, but it means there will be periods when their approach is out of sync with what the market rewards.
The Conviction-Based Approach
PMS managers invest with conviction, which means they:
- Hold through volatility: They do not sell simply because prices fall
- Wait for value to be recognized: Their thesis may take years to play out
- Avoid chasing trends: They do not jump into what is currently popular
- Accept short-term pain: They prioritize long-term results over quarterly performance
This approach requires patience from investors as well as managers.
Understanding Drawdowns
Drawdowns, or peak-to-trough declines, are normal in concentrated portfolios. A 20-30% drawdown can occur even in good PMS strategies during market corrections. This does not indicate manager failure; it reflects the nature of equity investing.
What matters is not the drawdown itself but how the portfolio recovers. Good managers often produce strong returns after drawdowns because they maintain conviction in quality businesses purchased at reasonable prices.
When to Be Concerned
Not all underperformance is acceptable. Warning signs include:
- Process changes: The manager abandons their stated investment philosophy
- Team departures: Key investment personnel leave
- Style drift: The portfolio starts looking very different from what was promised
- Communication breakdown: The manager cannot explain performance clearly
These issues suggest fundamental problems, not cyclical underperformance.
The Danger of Switching
Investors often switch PMS providers after underperformance, typically moving to whoever performed best recently. This pattern is almost guaranteed to produce poor results:
- You sell after poor performance, locking in relative losses
- You buy into another strategy after strong performance, often near its peak
- Taxes and transaction costs reduce your capital
- You never capture a full cycle with any manager
Studies consistently show that patient investors who stick with quality managers outperform those who switch frequently.
Setting Realistic Expectations
Before investing in PMS, understand:
- Outperformance is not linear: Even great managers underperform 30-40% of years
- 3-5 years minimum: Judge performance over a full market cycle
- Volatility is the price: Higher potential returns come with more ups and downs
- Patience is required: Conviction strategies need time to work
With proper expectations, underperformance becomes manageable rather than alarming.
How to Evaluate During Underperformance
Instead of reacting emotionally, assess systematically:
- Is the manager following their stated process?
- Can they explain why performance has been weak?
- Is the underperformance due to style being out of favour?
- How has the portfolio performed in previous similar periods?
- What does peer comparison within the same style show?
This analysis helps distinguish cyclical underperformance from genuine problems.
Conclusion
Underperformance in PMS is uncomfortable but often temporary. The concentrated, conviction-based nature of these portfolios means they will not track benchmarks closely. There will be periods when they lag, sometimes for extended durations.
The key is to distinguish between cyclical underperformance, which rewards patience, and structural problems, which require action. By understanding performance cycles and setting realistic expectations, you can navigate these periods without making costly mistakes.
Frequently Asked Questions
Why does PMS underperform sometimes?
PMS portfolios can underperform during certain periods because they follow concentrated, conviction-based strategies. When specific sectors or investment styles go out of favour, even skilled managers may lag benchmarks temporarily. This is a feature of active management, not a flaw.
Should investors exit PMS after underperformance?
Generally, no. Exiting after underperformance often locks in losses and misses subsequent recovery. Instead, evaluate whether the underperformance is due to strategy being out of favour (temporary) or fundamental issues with the manager (concerning). If the process is sound, patience typically rewards.
How long should I stay invested in PMS during underperformance?
A minimum 3-5 year horizon is recommended for PMS investments to allow strategies to play out across market cycles. Underperformance lasting 1-2 years is often followed by strong recovery. Evaluate the full cycle, not individual periods.
Last updated: 8 February 2026