Money managers under the microscope
Look at the whites of his eyes, and of his hair
Maurice Chevalier once observed that “old age isn’t so bad when you consider the alternative.” This may be apt for an entertainer, but does it have any relevance for fund management? Do grey hairs actually improve performance?
A couple of years ago I worked on some analysis of the board structures of investment trusts (closed-ended funds in the UK) and was surprised to find that the range of ages across some 1,630 directorships varied from 27 to 95. (Just 6 percent of these were held by women – but that’s for another day.)
While it is more than a little tricky to monitor whether there is a correlation between a fund manager’s age and performance, what we can do is measure the fund returns compared to the length of time a manager has been in place. In this way we can at least begin to see whether there is a relationship between tenure and performance.
I crunched some numbers for UK-domiciled, actively-managed equity funds in ten of the largest sectors (using Lipper Global Classifications) and came up with the average over- or under-performance of those funds where the manager has stayed with the same fund compared to the sector average for all funds.
In addition, while fund returns are normally shown net of expenses, I stripped this out so that the impact of the manager could be better identified.
Looking at 1-, 3-, 5-, 10- and 15-year performance for these ten sectors we end up with 49 data points (one classification has insufficient data over 15 years) and nearly three quarters of the time (73.5 percent) the average performance of funds with a manager retained throughout have out-performed the sector average. For example, among equity funds investing globally, those funds with a manager in place throughout a period out-performed the average of all funds by 3.26 percent over 3 years, by 0.64 percent over 5 years, by 20.2 percent over 10 years, and by 65.99 percent over 15 years.
Of course these are just averages and performance varies widely for individual funds whether the manager stays or not – even before we remember that past performance is not a guide to future performance! But to check on the robustness of these initial findings, I then looked at the median performance of funds in three of these classifications (Equity UK, Europe ex-UK, and Global). The median performance for those funds where the manager is present throughout a period out-performed the others every single time.
Interestingly, using medians makes those funds with the same manager in place throughout look better even in sectors where the difference was not evident using a simple average. For Europe ex-UK equity funds, for example, funds with a retained manager out-performed all funds by 0.03 percent over 3 years, by 2.17 percent over 5 years, by 3.83 percent over 10 years, and by 10.52 percent over 15 years.
As is often the way with historical fund returns there is also the issue of survivorship bias: the analysis above is just based on those funds that are currently available to investors. But in this case survivorship is precisely what we are trying to identify. From this initial research there is a clear indication that investors should include the length of a manager’s tenure among their selection criteria.
This leads on to the issue of fund manager risk. One of the reasons why an investor chooses an actively managed fund will be the identity of the manager and the reputation he/she has built up. Coupled to this is the inevitable risk that a good fund manager may leave. Of course just because a manager has been in place for ten years, there are no guarantees they will stay, but it must surely give some reassurance. Conversely an investor may be reassured that a poorly performing fund manager may be replaced – every cloud has a silver lining, as it were.
Clearly a good longer-term track record is worth its weight in gold, not just silver. As the American journalist Mignon McLaughlin once commented, “the time to begin most things is ten years ago.” We may all be clever with hindsight, but perhaps investors can play this to their advantage when selecting a fund manager.
(Editing by Joel Dimmock)
((email@example.com; +44 20 7542 3218))