September 2020 - Chicago Global


In this thought-provoking article, Chicago Global’s advisor Larry Siegel and Paul Kaplan of Morningstar discuss the hazards of extrapolating data from the best performing stock markets over the past 120 years, an era marked by unprecedented wealth generation. Investors risk forming overly optimistic beliefs based on the performance of markets that survived and thrived during this period. Bias arises when failed investments go unobserved or are ignored. Larry and Paul show that equity markets fared best in countries with stable governments, expansive immigration policies and resilient economies.

A key take-away is that survivorship bias, along with behavioral biases — including familiarity, trend-chasing and disposition effect biases — lulls investors into believing that whatever had been profitable in past will continue. Investors must resist the impulse to chase recent performance and hold concentrated static portfolio, as these strategies are prone underperformance. A regularly rebalanced portfolio broadly diversified across assets and geographies is a more effective investment strategy over the long-term.

Accounting For Survivorship


On August 28 2020, the Chicago Booth Alumni Club of Singapore, Hong Kong and Zurich hosted a joint webinar inviting alumnus: Ivan Chelebiev (’16), Christina Lee (’13), and Oliver Banz (Moderator, ’05) to discuss the impacts of recent events on Global markets and trends in Wealth Management.

Click for a pdf version of the summary

Recent Trends in the Region

Christina (Hong Kong): The recent unrest in Hong Kong resulted in a large outflow of assets from ultra-high net worth individuals (UHNW) and family offices. Their new destinations being:

  1. Singapore; due to its proximity, similar time zone, and low language barrier
  2. UK; due to the pound weakening, low real estate price, and its ties to Hong Kong
  3. US; because it has not signed a tax data sharing treaty with China. This implies that US wealth managers do not have to disclose information about their clients.

Ivan (Singapore): Singapore is building a fund management destination to rival the Cayman Islands. Currently, a Cayman domicile is the gold standard for hedge funds due to its tax advantages and proximity to the US. However, Singapore has put up a whole-of-government effort to establish a new hotspot for managers by matching the tax advantages and subsidizing the entire value chain. Since it is a government initiative, although speed might not be the project’s biggest strength, the scope certainly is.

New Trends and Regulations in Asia

Christina: In Hong Kong, we are seeing a rapid increase in the number of family offices and trusts being set up by UHNW individuals due to the changes in regulations, increasing sophistication of investors, and a shift in preference toward more flexible services by the younger generation within UHNW families. Furthermore, seasoned bankers are leaving bulge bracket banks to launch their own advisory practices backed by these family offices.

China has recently imposed new anti-tax evasion regulations and adopted the Common Reporting Standard, a deal to share account information between OECD countries (except US). As a result, there is an increase in administrative tasks that wealth managers need to perform, from performing extensive background checks, to filing additional paperwork. This increases the operating cost of running a wealth management business for Asian clients.

Global markets in the age of Covid-19

Ivan: We are facing a strange, liquidity-driven rally, and it’s moving at “warp speed.”
However, fundamentals always dominate in the end. And this time around the fundamentals are VERY VERY weak.

The Covid-19 recession is unprecedented in every metric: its cause (virus), its depth (worst in 100 years), its duration (shortest in 100 years), the size and scope of stimulus (earliest, broadest, largest policy response in history), it’s market impact (fastest-ever drawdown and retracement), it’s ramifications (social, economic, and geopolitical fallout will be with us for the next five years).

Clearly, Covid-19 is not a civilization-ending event. The best minds in world are racing to solve it. They are backed by unlimited resources. Most likely this is the last pandemic in our lifetimes. We’ll adapt the way we work and live, just like we made many changes after 9/11 and the GFC. And we’ll have incredible leaps in technology to contain future viruses. 

On the other hand, reversing globalization is NOT a zero sum game but something far worse. Nations will strive to become less dependent on one another, especially for food and medical supplies. This will have strategic implications. Nations will have less of a stake in each other’s wellbeing. They will focus on dividing the pie rather than working together to enlarge the pie for all. It will be a less prosperous world, and a more troubled one. 

Christina: The market crisis generated mostly excitement among my clients. SARS has taught Chinese investors to see systemic shocks as buying opportunities rather than disasters.

So, what should we do with our money?

Ivan: Historically, the standard allocation framework mixed public and private equity, hedge funds, real estate, and bonds. A large emphasis on bonds made sense as a natural hedge for economic weakness. It was a boring but effective strategy, and it worked while  interest rates marched lower over the last 40 years. However, with rates at 0% for the foreseeable future bonds offer only downside. Furthermore, managers have pushed their mandates to survive in a narrow, tech-driven market. Portfolios that look diversified on paper are mostly relying on growth. There is no ballast in a zero interest rate world.

Against this backdrop, it is critical to diversify across every dimension of risk, and rebalance regularly. Diversification can come in many ways. For personal investors, this might mean selling the large tech stocks that have dominated the market in recent times and buying value stocks. For larger investors, this entails analyzing managers by looking at their actual holdings, rather than assuming labels and categories reflect their true risk exposures.

Additionally, the recent surge in commodities such as gold and silver appears to be driven by pandemic-induced fears about debt, inflation, and geopolitics. Each of those can be hedged directly rather than by buying gold. Gold’s value and its defensive properties are highly speculative and don’t merit a large allocation.

*This is only a brief summary of the webinar. To learn more, please visit:

**This document has been provided solely for information purposes and does not constitute an offer or solicitation of an offer or any advice
or recommendation to purchase any securities or other financial instruments


Investor Behavior

“Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing” is the prominent disclaimer in every advertisement of mutual funds that we come across. While this disclaimer is true, are mutual fund investments only subject to market risks? Over the past 5 years, the S&P 500 has returned 12% per year but the average equity investor has only earned 8% per year (DALBAR 2020). If markets were the only risk factor, then why is the gap between market return and investor return so large?

Return Chasing Behavior

Investor behavior plays a large role in investment performance. Particularly, investors’ propensity to chase returns by jumping from one fund to another based on historical returns. Investors tend to buy funds after a period of good performance and sell funds after a period of poor performance (“buy high, sell low” phenomenon). The underlying assumption made by investors is that past performance can help in predicting future performance. However, is this a good assumption for mutual funds?

Persistence in Mutual Fund Performance: Indian Context

If mutual fund returns were persistent, we could conclude that past performance of mutual funds tells us something about future performance. A recent study conducted by shows that there is no persistence in mutual fund returns in India.

The study ranked all the mutual funds into deciles (10 equal sized bins) based on 1 year past performance. The returns of these funds were then observed 1 year into the future. The results are as follows:

  • Only 13% of the best performing funds (top decile) still remain best performers after a year
  • 52% of the best performing funds give above average returns after a year (coin toss, isn’t it?)
  • 19% of the best performing funds become the worst performing funds (bottom decile) after a year

This exercise was repeated with a 3 year and 5 year look back period. The results were as robust.

Selecting mutual funds based on past performance might seem intuitive but the data is clear that there is no persistence in performance. The Indian mutual fund industry isn’t an outlier. There have been numerous studies on this topic globally and the conclusion is the same in (almost) every country*. The popular disclaimer “Past performance doesn’t guarantee future returns” holds true and should be taken seriously.

Link to the video –

Persistence of mutual funds in other countries: 

*American Context: Carhart M, March 1997, ’On Persistence in Mutual Fund Performance’, The Journal of Finance, Vol. 52, No. 1, pp. 57-82

*British Context: Cuthbertson K, Nitzsche D & O’Sullivan K, September 2008, ’UK mutual fund performance: Skill or luck?’, Journal of Empirical Finance, Vol. 15, pp. 613-634

*Chinese Context: Dutta A, Zhao Y, Yi R & Su R, July 2012, ’Persistence in Mutual Fund Returns: Evidence from China’, International Journal of Business and Social Science, Vol. 3, No. 13

*Danish Context: Christensen M, March 2005, ’Danish Mutual Fund Performance – Selectivity, Market Timing and Persistence’, Finance Research Group, Working Paper No. F-2005-1

*Greek Context: Babalos V, Caporale G, Kostakis A & Philippas N, 2008, ’Testing for Persistence in Mutual Fund Performance and the Ex Post Verification Problem: Evidence From the Greek Market’, European Journal of Finance, Vol. 14, pp. 735-753