Investors are always on the lookout for a successful fund manager, so there is a vast array of academic research on how to find one. Identifying successful people in active fund management seems easier than in other industries, as there are huge data sets associated with specific fund bosses publicly available; by contrast, there are probably many reasons and people behind the (latest) failure of Marks & Spencer’s womenswear collection or the surprising success of a new car model. So what does the data tell us?
Is there no substitute for experience?
An old adage says there is no substitute for experience. Andrew Clare, associate dean and chair of asset management at London’s Cass Business School, set out to test this idea. Using data from the fund platform Morningstar from 1986 to 1995, he examined the performance of 93 “experienced” fund managers – those in charge of the same fund for at least ten years. The mean tenure of this set of fund managers was 17.4 years. Analysing their performance data, Clare found little evidence to show that good performance persists over time. There was also no evidence that how a manager performed in the first five years of their career was in any way predictive of how they would do over the last five years.
“We found that the benchmark-adjusted performance of these managers was good in their early careers, but that this performance tended to decline the longer the manager was in place,” says Clare. These managers may have had a good start owing to luck or skill, but then their luck ran out or their skills deteriorated. “Another complementary and equally plausible explanation” is that as time passed, initially successful managers became increasingly loath “to risk their reputations and their careers by continuing to take the risks necessary to outperform their benchmarks”.
Either way, don’t assume a highly experienced manager will necessarily produce better returns than his neophyte counterpart. Interestingly, however, for those investors who would still prefer to plump for an experienced fund manager, Clare’s analysis reveals certain additional key traits that are related to positive performance: relatively low fund fees, concentrated portfolios and a small-cap bias.