Investment Insights: The 'curse' of the winner
Welcome to the latest issue of our quarterly investment insights newsletter from Chief Executive Officer for Investments Justin Onuekwusi.
The winner’s curse
The danger of chasing past performance
In the 1970s, researchers at an oil company noticed something strange about auctions for drilling rights in the Gulf of Mexico.
The companies winning the auctions were not always the ones that went on to make the best returns.
The reason was relatively simple. Nobody knew the true value of the oil reserves. The winning bidder was therefore often the company with the most optimistic estimate and, sometimes, the company that had simply paid too much.
It became known as the winner’s curse.
There is an obvious parallel with investing.
As humans, we're wired to think this way. We take recent experience and use it to predict the future. Investors are naturally drawn to what has worked most recently, whether that's a soaring stock, a fashionable sector, the fund at the top of the tables or a star fund manager. We assume recent winners are likely to remain winners. Yet the evidence suggests that past performance is often a far less reliable guide to future returns than many investors realise.
Behavioural economists call this recency bias: our tendency to place too much weight on what's happened lately and too little weight on the longer-term picture. Indeed, to the contrary, markets have a habit of making yesterday’s obvious decision tomorrow’s uncomfortable one.
Markets don’t stand still
Leadership changes, investment styles move in and out of favour, and periods of exceptional performance are often followed by more ordinary outcomes. Relying too heavily on past performance can therefore lead investors to buy after much of the opportunity has passed, while overlooking opportunities elsewhere. In the worst cases, they end up buying high and selling low. Not just once, but again and again.
Why winners rarely stay ahead
One of the most persistent myths in investing is that yesterday's winners will be tomorrow's winners. While strong performance often attracts the most attention and inflows, the evidence suggests that sustained outperformance is remarkably rare.
The more useful question is not whether yesterday’s winners will continue to outperform, but whether recent performance still reflects the opportunity ahead. Sometimes the strongest future potential may lie in areas that other investors have begun to overlook.
At SJP, this is a question we spend a lot of time thinking about when considering the selection of our fund managers.
One of the most compelling studies of manager hiring and firing decisions examined more than 400 institutional manager replacement decisions.
The findings revealed a familiar pattern. Investors tended to hire managers after a period of strong outperformance and terminate managers after weak performance. Prior to the decision, newly hired managers had generated cumulative excess returns of over 11%, compared with just 2% for the managers they replaced.
Yet what happened next was striking. In the three years following the decision, it was the fired managers that outperformed the newly hired managers.
By the time performance becomes sufficiently compelling to drive capital flows, much of the opportunity may have already passed.
The lesson is not that investors should automatically back underperforming managers. Rather, it shows why recent performance can be difficult to separate from future opportunity. We encourage our investment team to look beyond recent returns before deciding whether to appoint, retain or replace a manager.
The odds against performance chasing
The hiring and firing study above shows what performance chasing can look like in practice. But is that simply one example or part of a wider pattern? The evidence suggests the latter.
If strong performance alone predicted future success, we would expect the best performing funds to remain among the best performers over time. The data suggests otherwise.
Research from the 2026 S&P Dow Jones Performance Persistence report looking at a universe of 160 US large cap equity funds highlights how difficult sustained outperformance is to achieve.
A fund ranked in the top quartile of performance between 2019 and 2022 had only around a 6% chance of remaining in the top quartile over the following three years. However, there was a greater than 25% chance that it was bottom quartile over the same period.
In other words, a top performing fund was more than four times as likely to become a laggard than remain a leader. Movement in the opposite direction was also significant.
For funds that ranked in the bottom quartile between 2019 and 2022, only c.11% remained in the bottom quartile over the next three years. On the other hand, almost 50% moved into the top quartile, making them far more likely to become future leaders than to remain among the poorest performers.
The message is not that investors should automatically favour yesterday’s laggards. Rather, the data illustrates how quickly fund rankings can change and why recent performance alone tells us relatively little about what may happen next.
Similarly, contrarian investing does not mean automatically buying what has fallen or retaining every underperforming manager. It means being willing to look beyond recent returns and assess whether the underlying investment case remains intact.
Why patience matters
If performance chasing is one side of the behavioural challenge, patience is the other. As economic conditions and valuations evolve, different investment styles move in and out of favour. Being genuinely contrarian rarely feels comfortable. Yet this is often when discipline matters most.
Yet no investment style remains dominant indefinitely. Periods of marked divergence have frequently been followed by sharp reversals. This matters for manager selection because a manager’s results may reflect the fortunes of their investment style as much as the quality of their decisions.
When leadership changes, previously overlooked areas of the market can recover quickly. Investors who react to a difficult period by selling may therefore miss the subsequent rebound.
This is why manager selection requires deeper analysis than simply reacting to recent performance. The critical question is whether underperformance reflects a deteriorating investment process or an otherwise sound approach that is currently out of favour. You can only assess that via in-depth onsite due diligence with the fund management team.
That the performance of any fund manager – no matter how skilful – can go through prolonged periods of both outperformance and underperformance reinforces the importance of manager blending and diversification. There is no consistent way to successfully predict which manager will find favour over each one or three-year period. Instead, we prefer to combine managers with complementary styles; where one manager can provide a valuable offset to another that might be experiencing a difficult period. We believe that this is a far more robust approach than simply picking which manager has performed well recently and selling one that has struggled.
Conclusion
The winner’s curse is a useful reminder that the most obvious winner is not always the best future investment.
That is why our manager selection process goes well beyond the performance numbers. We want to understand why a manager has delivered, whether their edge is repeatable, how they behave when markets move against them and whether the people and process behind the track record remain intact.
And you cannot do all of that from a desk.
Our teams spend time with managers in their offices, meeting the people making the decisions, challenging their thinking and understanding how the investment process works in practice. In depth onsite due diligence matters because a spreadsheet can tell you what happened. It rarely tells you enough about why it happened, or what might happen next.
Sometimes that work leads us to change a manager. At other times it gives us the conviction to remain patient when recent performance is disappointing and the easier decision would be to chase the latest winner.
Because avoiding the winner’s curse is not about ignoring performance. It is about putting performance in context.
The job is not to identify yesterday’s winner. It is to understand who has the ingredients to win tomorrow.
SJP Approved 06/10/2026
