(Reuters) - Fund managers may show genuine and long-lasting skill, but do more poorly as the good ones are piled with responsibilities.
While many studies have shown fund manager performance either does not add or actually subtracts value, these studies have tended to evaluate the mutual fund itself rather than the person running it.
A newly released study from The University of Oklahoma looked only at managers and how they did, rather than the fund itself, and limited itself to measuring only funds with solo managers.
Looking at data from 1992 to 2014 the results were encouraging for those taking the side of active fund management, which has seen its market share dwindle sharply as investors opt for low-cost index products.
Performance persistence over time is “significantly larger than what one would observe if managers had no skill, which suggests that the observed performance of managers cannot be explained by luck alone,” Ilhan Demiralp and Chitru Fernando write in the study.
As for the argument that fund managers who outperform can’t sustain it, the outperformance “continues for at least six years,” according to the study.
Unsurprisingly, managers who work for fund families and who outperform the market are often given new funds to manage in addition. That’s good economics for the manager and the fund family, but not so good for clients who suffer as even talented managers are eventually stretched too thin. Among the top 10 managers of just one fund, benchmark-adjusted returns average 14.1 percent annually but fall to 7.79 percent when the manager runs two or more funds with the same mandate.
If managers are asked to manage funds in new asset classes or with different goals, performance suffers even more, with top manager performance falling to 5.3 percent. (here)
None of this makes it any easier for investors to pick winning fund managers, but they would appear to be out there and once identified their ability to outperform seems to persist for a long enough time to make the search worthwhile.
The difficulty, of course, is that just as investors are identifying a mutual fund manager as talented, so are their bosses, who duly load them down with new responsibilities diluting their attention.
LOAN WOLVES OR PACKS?
Nor is it by any means a sure thing that having a single person manage an investment fund is the best model. The Oklahoma study is certainly useful in providing new evidence suggesting skill exists but the question of how best to manage funds, and the impact of having more than one manager, takes the issues to another level of complexity.
The trend has certainly been towards teams. Whereas in 1992 almost 70 percent of mutual funds had only one manager, now about 70 percent are helmed by a team.
What’s more, there is evidence those teams do a better job. A 2016 study by Saurin Patel of the University of Western Ontario and Sergei Sarkissian of McGill University found that team-managed fund outperform by a variety of measures and do so while taking on no more risk than solo practitioners.
Three-person teams are the sweet spot: outperforming single-managed funds the most, by about 60 basis points annually on a risk-adjusted basis. Teams of two and four also outperform, but by less.
Perhaps a team simply offers the possibility of bringing divergent approaches and skills to the task of money management.
Michael Mauboussin, Dan Callahan and Darius Majd, strategists at Credit Suisse, argue that “cognitive diversity” is beneficial, combining people with not only different knowledge bases but also different methods and mental models.
Gender diversity can also help.
“Experiments that measure collective intelligence show that teams with a large percentage of women perform well and better than teams with a similar percentage of males,” they write in a note to clients.
That just 10 percent of U.S. fund managers are women, compared to about a third of doctors and lawyers, suggests that clients are not best served by the current arrangements, both of recruiting but also training, retaining and combining fund managers.
The good news is that the skill to outperform is out there; more daunting is finding it and combining it to best effect.
(James Saft is a Reuters columnist. The opinions expressed are his own)
Editing by James Dalgleish
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