Mutual fund managers hold in their hands the retirement income of millions of people. So it should be of great interest to retirees, and those approaching retirement, whether mutual fund managers are qualified for the job.
A recent study examined 2,846 managers of actively managed mutual to try and answer the question: what is the role of merit in the careers of mutual fund managers?
From the study, which was published in the Financial Analysts Journal:
The results provide evidence of the role of merit in the careers of managers of actively managed funds. Consistent with prior studies, we found that relative performance is an important determinant of career success as a mutual fund manager. We showed that managers who underperform on a style-adjusted basis are at greater risk of losing their jobs.
However, the evidence on the role of superior performance is less strong. Surviving managers of all tenures, even those who lasted 10 or more years, outperformed those with shorter tenures, but we also showed that they did not consistently outperform the market on a risk-adjusted basis or their style benchmark. Data on style-adjusted monthly returns show that solo managers with 10 or more years of tenure outperformed about as often as they underperformed.
When performance is calculated using Carhart or Jensen alphas, even solo managers with tenure of more than 10 years show no ability to beat the market on a risk-adjusted basis. The key to a long career in the mutual fund industry seems to be related more to avoiding underperformance than to achieving superior performance.
The study suggests that, for mutual fund managers, long careers don’t come as a result of consistently outperforming markets, but rather as a result of avoiding under-performance. From the study:
The lack of significantly better performance over time by long-tenure managers suggests that longevity is related to the avoidance of underperformance. Additional factors may be at work in impairing the performance of these managers. For example, researchers have found evidence that some underperforming managers at smaller funds are able to retain their positions despite their performance.
Additionally, other research has shown that a significant proportion of the best mutual fund managers earned their reputations with high rates of return early in their careers and had performance that was significantly worse later on. Whether this early performance was due to luck or early superior skills that atrophied later is subject to conjecture and further research.
The study, authored by Gary E. Porter and Jack W. Trifts, was published in the July/August issue of the Financial Analysts Journal. The entire paper and analysis can be read here.
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