Category Investments

What really makes a fund manager successful?

17 January 2006 Johan du Toit

We know that relying on past performance alone to select a fund manager is likely to produce disappointing results.

We also know that intuitively, fund managers that display certain characteristics for example, a solid process and sensible philosophy are more likely to be successful. But are there any specific fund manager attributes that have proven to increase the likelihood of success?

The answer is yes, according to a groundbreaking study that recently appeared in the Canadian Investment Review. The study, which took place over the six-year period ending December 2003, considers hundreds of different investment managers across different regions, and analyses how a number of different organizational and process factors affect the ability of the fund manager to produce superior results.

Of the 17 factors that were tested, four were identified as being statistically significant in explaining an investment managers performance:

1.  Ownership: The study concluded that investment management firms that have a high degree of employee ownership are more likely to produce superior results, than those that have little or no employee ownership. This is intuitive as the greater the degree of ownership, the greater the incentive for employees to produce good performance.

2.  Low personnel turnover: It was shown that firms that had a high degree of turnover in terms of key investment staff, tended to produce inferior results when compared to those with low turnover of such staff. It was also concluded that low levels of staff turnover were positively correlated with the level of ownership i.e. boutique forms tend to have lower levels of turnover of key investment individuals and that this manifested itself in superior performance.

3.  Number of counters: The conclusion here was that as portfolios became too diversified in terms of the number of counters held, the tendency to generate outperformance decreased. Again, this is intuitive as the more counters held, the lower the tracking error and the higher the likelihood of producing average returns. Furthermore, the study also highlighted the fact that the larger a firm, the more likely it was to have a low tracking error. It suggests that this is further evidence of the tendency of larger firms to manage portfolios in a manner that reduces business risk rather than investment risk.

4.  Bottom-up: This factor relates to the percentage of the investment process that was focused on top-down asset allocation, or theme selection, versus bottom-up stock picking. The conclusion was that the greater the focus on bottom-up stock picking, the more likely the firm was to produce superior results.

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