Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Age begets wisdom in funds management: Study
Chalk one up for the old guys: a new study has found that, where funds management is concerned, age is correlated with both performance and persistence.
“The most consistent result from our estimates of the cross-sectional relationship between manager characteristics and manager skill… are that accumulated wisdom, however this is proxied, has a positive relationship with manager skill: the longer the manager’s tenure, the more experienced the manager is and the older the manager, the better the performance, other things equal,” says the study, titled ‘Manager characteristics: Predicting fund performance’.
The study, published in the International Review of Financial Analysis, found that that performance persistence is also most evident among male managers, non-CFA managers, quant managers, managers with high SAT scores (which are used for college admission), and managers that have managed their fund for a long period of time. Interestingly, for those concerned about key man risk, “the larger the fund management team, other things equal, the poorer the performance.”
However, “there is evidence to suggest… that long experience over short experience is a particularly important characteristic and explains much of the findings on persistence around gender and the CFA designation.”
In comments reported by Bloomberg, one of the researchers, Professor Andrew Clare (photo at top), attributed the CFA result to the fact that older, and so more experienced managers, are less likely to have obtained a CFA, and that it essentially acts as a proxy for inexperience (having a PhD apparently also detracts performance from the fund).
“We see that among both long experience managers and separately among short experience managers, there is no significant difference between CFA and non-CFA manager in one-month ahead performance,” the report says. “However, among CFA managers and non-CFA managers separately, long experience managers go on to significantly outperform short experience managers in both cases… Again, the results suggest that it is experience rather than the CFA designation that plays an important role in the previous persistence findings.”
The study examined Morningstar data on more than 6000 US equity mutual fund managers and tracked them even when they switched funds, creating a data set of 16,207 manager histories – likely representing the first research to do so.
“We find that more experienced fund managers tend to run portfolios that have: lower exposure to the market, size and momentum risk factors; higher exposure to the value risk factor; and no significant exposure to idiosyncratic risks,” the report says. “We also find that when a manager has a stake in a fund they tend to have a lower exposure to all of these risk factors relative to managers without a stake in their fund.”
