Does manager experience matter in a mutual fund? Maybe not, according to new research by Bryant University Professor of Finance Jack W. Trifts.
According to Trifts and Gary E. Porter, associate professor of finance at John Carroll University’s Boler School of Business, even the best solo mutual fund managers seem to get worse at their craft the longer they practice it.
Among the academics’ other findings are:
• Solo fund managers who survived more than 10 years were likely to have performed at or above the market in their first three years;
• Although each of the very best managers generated positive compound annual market-adjusted returns following their first three years, the majority were not able to maintain that level of performance.
“We think this occurs because ‘superior performance’ is really just random luck,” Trifts stated. “Mutual fund managers who have high performance early in their careers are branded stars while those with poor performance tend to disappear from the industry.”
But those stars fade: The longer a manager runs a fund, the higher the likelihood of mean reversion setting in, “even for people like Peter Lynch, argued by some to be the greatest fund manager of all time,” Trifts said.
Trifts and Porter examined data spanning more than 80 years to identify the best solo mutual fund managers and the keys to their success. They also examined the relationship between performance and tenure in a sample of 289 solo managers of 355 actively- managed funds within the nine Morningstar styles.
Hung Tran writes for Money Management Executive.