Is guru investing a wise strategy?

Those seeking success by following the portfolios of influential investors may outperform the market – but not in all cases

Is guru investing a wise strategy?

One oft-dispensed piece of financial advice is to invest like the smart investors do. Over the past decade, some strategies have been built around that very premise – and they’ve been far from a sure thing.

As Joachim Klement, CFA explained in a blog post published by the CFA Institute, such copycat investment strategies basically draw from the quarterly reports of widely-known investment gurus, putting money in the same stocks that they do.

The obvious problem, Klement noted, is that such portfolio snapshots are taken every three months, during which time intermediary changes might have happened – some holdings might have been sold then bought again, for example.

“But if the investment guru is a long-term investor and holds mostly stocks and very little in terms of derivatives or private assets, the copycat strategy might just work,” he said.

To evaluate the success of such “guru investing” approaches, he looked at Bloomberg data showing the track records of three U.S.-listed ETFs that rely on the strategy – the Global X Guru Index ETF (GURU), the AlphaClone Alternative Alpha ETF (ALFA), and the Goldman Sachs Hedge Industry VIP ETF (GVIP) – all of which invest exclusively in U.S. stocks.

“Since the 2016 launch of the GVIP ETF, two of these ETFs have materially outperformed the S&P 500,” he said. During that time, he said GURU has underperformed the benchmark by 0.5% per year in total returns, while ALFA and GVIP have beaten the index by 2% and 2.6% per annum, respectively.

“[T]hat outperformance comes with higher volatility and greater drawdowns during a crisis,” he said. In the pandemic-induced downturn of March 2020, the S&P 500 fell by 19.6%, while GVIP declined by 21.4% and ALFA plummeted by 25.1%.

“[T]he copycat ETFs either lost all the outperformance they created from 2016 to 2020 in one month, as in ALFA’s case, or underperformed the S&P 500 after previously matching its performance, as with GURU and GVIP,” Klement said. “It was only in the recovery since April last year that the copycat funds started to outperform.”

Taking the analysis further, Klement looked at how the longer-lived GURU and ALFA ETFs have fared since they were launched in mid-2012. Over that near-decade, he said GURU and ALFA had higher volatility than the S&P 500, and all they had to show for it was benchmark underperformance of 1.3% and 1.6% per year, respectively.

“These copycat funds very much resemble fair weather investments that don’t perform over an entire cycle,” he said.