How Should a Manager Respond When an Investment Is Underperforming?

A manager should address underperformance directly, explain its causes, and show what evidence supports the next steps. The response needs to help investors distinguish a temporary setback from a broken thesis, while making clear what risks remain and what would prompt a change.

Explain the Shortfall Plainly

Start by stating the period being discussed and how performance compares with the fund's objective and relevant benchmark. Separate broad market effects from decisions made by the manager. For a private investment, explain how the valuation was reached, what operating results changed, and whether the value reflects a completed transaction or an estimate.

Investors should be able to see what happened without having to infer it from a long presentation. The manager can identify the largest contributors and detractors, but should also explain how those results connect to the strategy. Avoid using a single strong or weak period to claim that the whole approach is proven or broken.

Show What Has Changed

Describe the current condition of the investment and compare it with the original thesis. Identify assumptions that remain supported, assumptions that have changed, and information that is still uncertain. If the team has taken corrective action, explain what it did, who is responsible, and what evidence would show that the action is working.

A credible update also states what the manager cannot control. For a company, that may include customer demand, financing needs, or operating execution. For a fund, it may include liquidity, exposure, or changes in the opportunity set. The manager should explain the effect on the rest of the portfolio and disclose any new concentration or funding risks.

Set Clear Conditions for Review

Investors need a defined way to monitor the situation. The manager should identify the milestones, reporting cadence, and decision points that will matter. Explain what would lead to holding the investment, changing the plan, reducing exposure, or exiting. Avoid promises of a particular recovery or return. The investment underperformance question guide can help investors prepare a focused review.

For a fund manager, the update should also cover whether the process and team remain intact, whether risk limits were followed, and whether the fund's terms or liquidity have changed. A clear regular portfolio update makes it easier to compare explanations over time. Investors can use the fund manager track record guide to assess whether past results and current explanations are supported by evidence.

Avoid Chasing Performance

Underperformance alone is not a complete reason to sell, just as strong recent results are not a complete reason to buy. In my experience, investors can hurt results by moving into strategies after they have risen and abandoning them after a decline. Review the manager's actions, the fit with the mandate, and the evidence behind the thesis together.

If the manager cannot explain the shortfall, is late in reporting material information, or changes the story without evidence, record that concern and escalate it through the family's governance process. A useful response gives investors a basis for judgment. It does not ask them to rely on reassurance.

Read next: When should a family change an investment manager or strategy?

In our experience, this is a recipe for underperformance.

Sources: How to Start a Family Office, The Single Family Office. Informational only, not financial, legal or tax advice.