Why Fund Manager Scoreboards Can Make Markets Dumber
Every quarter, financial media light up with tables of the “best performing” funds. Retail investors often chase these winners, assuming past returns are proof of future skill. Yet research shows that these league tables can distort markets themselves, pushing prices further away from reality and weakening the very discipline investors rely on.
A 2014 study by Stephen Cheung (University of Sydney) and Andrew Coleman (CEO, Teaminvest Private) provides powerful evidence of how this plays out in practice.
The tournament effect
Cheung and Coleman simulated markets where participants competed like fund managers. Their portfolios were ranked each year on short-term paper returns, with new inflows allocated to those at the top of the table. This is exactly how many managed fund inflows behave in the real world.
The results were striking. In environments already prone to bubbles, these incentives didn’t just nudge prices; they magnified mispricing significantly, and the distortion became worse with experience.
Instead of learning from past bubbles, participants leaned harder into them when career or flow incentives were at stake.
Riding bubbles, not correcting them
The paper explains why: managers face a career risk if they sell out of an overvalued market too early. As famed fund manager Jeremy Grantham once remarked, “fund managers are simply not prepared to take the career risk of being wrong for a little while and losing business”.
In Cheung and Coleman’s experiments, this pressure meant markets often failed to “crash back” to intrinsic value. In fact, in some tests, prices remained inflated right until the final trading periods.
Even in stable environments, where intrinsic value was crystal clear, tournament-style incentives still produced a persistent 5% overpricing effect. Small, but telling: when incentives reward the wrong metric, markets drift away from reality.
Why this matters for investors
For Teaminvest members, this research underlines a vital truth:
- Incentives matter. Fund managers may act rationally for their own careers, but irrationally for investors’ wealth.
- Paper returns ≠ intrinsic value. Fund manager rankings can reflect recent share prices, not long-term business worth.
- Patience is an edge. Unlike fund managers tied to inflow cycles, individual investors can ignore short-term scoreboards and wait for prices to match intrinsic value.
This is exactly why Teaminvest exists. Our process is built to strip away market noise and align decision-making with long-term wealth creation. Our methodology is not tied to nor incentivised by a short-term scoreboard.
We start by filtering thousands of listed companies through Conscious Investor, our proprietary software, which screens out weak businesses (Capital Killers) and highlights financially strong candidates (Wealth Winners). From there, members engage in collective qualitative analysis: rigorous discussions drawing on the real-world experience of business owners and professionals across industries.
The final step is perhaps the most important: valuation with patience. Even the best business is not worth buying at any price. By calculating intrinsic value and demanding a margin of safety, we deliberately avoid the trap identified in Cheung and Coleman’s study, chasing inflated prices to stay competitive. Instead, we wait for price and value to align, then act with conviction.
This disciplined, repeatable process means Teaminvest members are not pressured by “career risk” or quarterly scoreboard rankings. They are free to think like business owners, not speculators. That freedom to step back from the herd and act rationally is what protects capital and allows compounding to do its real work over decades.
Key takeaway
The Cheung and Coleman study proves what long-term investors have always known: chasing rankings may feel safe in the short run, but it fuels bubbles and increases the risk of loss. Owning great businesses at the right price, and holding them with patience, remains the soundest path to wealth creation.
