If you really are determined to invest in actively managed funds (and there’s a whole host of reasons why you shouldn’t) you might just want to look at the fund manager’s social background.
A new study of asset managers in the United States has found that managers from less well-to-do families often tend to outperform their wealthier colleagues.
Oleg Chuprinin of University of New South Wales and Denis Sosyura of University of Michigan used hand-collected census data on the households in which managers grew up in order to measure how family background relates to their performance.
Perhaps unsurprisingly they found that fund managers, as a group, come from the wealthier echelons of society. Their fathers’ incomes are in the 90th percentile, they grew up in houses worth double the local average and were more likely to attend private schools and expensive universities.
But, the researchers found, fund managers from families in the top 20% of parental income underperformed those from the bottom 20% by 1.54% a year, on a risk-adjusted basis. There was also a much higher dispersion in returns delivered by managers from more prosperous backgrounds.
So, how can this disparity be explained? This is what the study concludes:
“Our evidence suggests that managers endowed with a low economic status at birth face higher entry barriers into asset management, and only the highest-quality candidates succeed in entering the profession. This explanation is supported by the evidence on managers’ promotions, which shows that managers with a low endowed status must deliver higher returns to stand a comparable chance of promotion with their high-status peers.”
The Chuprinin-Sosyura study is just the latest attempt to establish a link between the background and personal lives of asset managers and the returns they deliver. Other recent studies have found that female hedge fund managers are more likely to outperform their male counterparts, and that when a fund manager gets married or divorced their returns tend to suffer.
Studies like these are interesting to read, but generally the sample sizes are small. And is it worth the average investor spending time researching all these different factors? Of course it isn’t.
As I’ve mentioned before there are several criteria which, the evidence suggests, may indicate an increased likelihood of outperformance in the future. But properly researching, and continually monitoring, funds in this way is hugely time-consuming. There may be a case for paying someone to do it for you, but identifying future winners is such a rare and valuable skill that if there genuinely is someone out there who can do it consistently (and I personally doubt there is) they’re almost certainly charging a premium for it.
No matter how skilled a particular manager might be, the data shows, overwhelmingly, that only a tiny fraction are able to outperform a simple index fund, after costs, for any meaningful period of time.
Anyway, isn’t life too short to worry about your fund manager’s love life or where he went to school?
Related post:
If you’re determined to use active funds, at least do this
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
