Are Fund Managers Selling Performance - or Psychology?

“Do brand power and perceived expertise explain the survival of chronically underperforming funds?”

Introduction

In an efficient market, chronic underperformance should lead to extinction. Fund managers who fail to deliver risk-adjusted returns inferior to passive benchmarks should lose clients and assets.

Yet, paradoxically, they rarely do. Many persist for years; even decades - attracting inflows, charging high fees, and marketing the illusion of skill.

This essay argues that brand power and perceived expertise are the primary explanations for the survival of chronically underperforming funds, but their influence operates through psychological, social, and institutional channels rather than rational analysis.

Drawing on behavioural finance, marketing theory, and empirical evidence from the asset management industry, it will show that trust, familiarity, and narrative credibility sustain investor loyalty long after performance has failed to justify it.

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1. The Paradox of Persistence

The data are unequivocal: most active funds underperform their benchmarks. The SPIVA Europe Scorecard (S&P Dow Jones, 2023) reports that over 85% of UK equity funds underperformed the S&P United Kingdom Benchmark over 10 years.

Yet the active fund industry continues to grow, with UK-domiciled funds holding over £1.5 trillion in assets (Investment Association, 2024).

Economic theory struggles to explain this persistence. Rational investors should switch to cheaper passive alternatives once underperformance becomes clear.

The fact that they do not implies that other forces - cognitive, emotional, and social - govern investor behaviour. In this sense, fund management is less a science of returns than a business of trust.

2. Brand as a Cognitive Shortcut

Brand theory, originating with Aaker (1991) and Keller (1993), defines a brand as a cognitive and emotional shortcut - a bundle of associations that reduce decision-making complexity. In financial markets, where outcomes are probabilistic and opaque, brand functions as a proxy for due diligence.

Investors cannot easily verify skill, so they infer it from reputation, size, and visibility. A strong brand (e.g., Fidelity, Jupiter, St. James’s Place) signals competence and stability.

This is a classic case of what Herbert Simon called bounded rationality: when information is imperfect, people substitute heuristics for analysis.

Thus, brand strength becomes a form of perceived expertise. It shields managers from short-term performance shocks because investors interpret underperformance as temporary rather than terminal. In effect, reputation functions as a buffer against reality.

3. The Psychology of Trust and Authority

Behavioural finance provides further insight. Investors exhibit a strong authority bias - the tendency to defer to perceived experts - and confirmation bias, seeking evidence that validates prior trust.

Once a fund brand is seen as reputable, investors reinterpret poor returns as exceptions rather than symptoms.

Moreover, fund relationships often mimic professional-client dynamics in medicine or law: investors value reassurance and continuity as much as results.

A well-dressed fund manager speaking confidently on Bloomberg may evoke the same deference as a consultant diagnosing an ailment.

In this sense, the financial brand is not just a label but a performance of expertise. The illusion of control, reinforced by professional demeanour and institutional pedigree, makes investors feel safe - even when empirical performance says otherwise.

4. The Power of Familiarity and Social Proof

Psychologists call it the mere exposure effect: familiarity breeds preference. Investors who see a fund house repeatedly advertised or endorsed by advisers develop subconscious affinity. In an industry saturated with uncertainty, familiarity feels like safety.

Social proof compounds this. When friends, financial advisers, or workplace schemes all use the same household names, deviation feels risky.

This herd behaviour is rationalised as prudence. Studies by Barber, Odean, and Zheng (2005) found that fund inflows are strongly correlated with marketing visibility and media mentions, not performance. In short, investors chase comfort, not alpha.

The collective trust in brand identity becomes self-reinforcing: the more popular a fund, the safer it feels - the financial equivalent of choosing IBM because “nobody gets fired for it.”

5. Institutional Incentives and Distribution Channels

Brand resilience is amplified by institutional architecture.Financial advisers and pension platforms often receive distribution fees or have approved product lists dominated by large fund houses.

Their incentives align with maintaining relationships, not recommending cheaper or better alternatives.

Similarly, default options in workplace pensions or ISAs often include legacy active funds with strong brand recognition, perpetuating market share despite underperformance.

The FCA’s Asset Management Market Study (2017) concluded that competition “works better on brand and service quality than on price and performance.”

Hence, brand loyalty is not merely psychological - it is structurally embedded. The system rewards familiarity, not merit.

6. The Narrative Economy of Fund Management

Fund managers are not just allocators of capital; they are storytellers. As Shiller (2019) argues in Narrative Economics, investors respond more powerfully to compelling narratives than to data.

A manager who can frame underperformance as “long-term discipline” or “temporary headwinds” can sustain investor confidence indefinitely.

This narrative framing transforms loss into loyalty: the investor becomes emotionally invested in the recovery story.

Indeed, many underperforming funds experience inflows after bad years, as loyal clients “average down,” echoing the gambler’s fallacy of believing losses precede wins.

Brand amplifies narrative: when a trusted institution tells a story of resilience, investors listen. The story replaces statistics as the measure of competence.

7. The Limits of Brand Immunity

Brand power and perceived expertise explain survival, but not indefinitely. When underperformance becomes chronic or systemic, even powerful brands falter - as seen in the collapse of Neil Woodford’s empire. Trust, once broken, erodes faster than it accumulates.

However, such collapses are exceptions precisely because regulation and inertia slow accountability. Investors rarely experience a single catastrophic event; they experience mediocre performance disguised as professionalism. The time bomb is not explosion but attrition.

Thus, brand power delays, rather than denies, the reckoning.

8. Policy Implications and the Path to Rationality

The persistence of underperforming funds poses both ethical and regulatory questions. Transparency initiatives such as value-for-money reporting and standardised benchmarks aim to re-anchor investor trust in performance, not reputation.

Yet the deeper challenge is educational and behavioural: to shift investors from emotional proxies (brand, familiarity) to empirical evaluation (risk-adjusted returns, fees).

Tools such as the GIP’s comparative performance dashboards - showing Sortino ratios, active share, and drawdowns - embody this shift.

Only when investors internalise that “trust is not a strategy” will markets allocate capital more efficiently.

Conclusion

Brand power and perceived expertise are not side effects of underperformance - they are its enablers. In a world of uncertainty, investors outsource judgment to reputation; in a world of complexity, they mistake fluency for skill.

The result is a market that rewards storytelling over statistics, comfort over competence. Chronic underperformance survives because brand converts credibility into currency - and because investors, preferring reassurance to reality, continue to pay the fee for faith.

Until investors learn to value transparency over theatre, the most profitable skill in fund management will remain not beating the market - but beating psychology.

References

• Aaker, D. (1991). Managing Brand Equity. Free Press.

• Keller, K. (1993). Conceptualizing, Measuring, and Managing Customer-Based Brand Equity. Journal of Marketing.

• Kahneman, D. (2011). Thinking, Fast and Slow. Penguin.

• Barber, B., Odean, T., & Zheng, L. (2005). “Out of Sight, Out of Mind: The Effects of Advertising on Mutual Fund Flows.” Journal of Business.

• S&P Dow Jones Indices (2023). SPIVA Europe Scorecard.

• Financial Conduct Authority (2017). Asset Management Market Study.

• Investment Association (2024). UK Fund Market Report.

• Shiller, R. (2019). Narrative Economics. Princeton University Press.

Disclaimer: This article is for educational and informational purposes only and does not constitute financial advice. Past performance is not a reliable indicator of future results. Investors should conduct their own research or seek independent, regulated advice before making any investment decisions.

Alpesh Patel OBE

www.campaignforamillion.com