Because managers of mutual funds and corporate executives who attended the same university frequently run in the same social circles or maintain their friendships well past graduation, the corporate executives tend to share information with the portfolio managers, a new study found. As a result, the managers tend to invest in those companies, which tend to deliver strong performance because of the quality of the information being shared.
The study, called “The Small World of Investing: Board Connections and Mutual Fund Returns,” is by Lauren Cohen of the Yale School of Management, Andrea Frazzini of the University of Chicago and Christopher Malloy of the London Business School.
In fact, a portfolio of connected stocks outperforms non-connected stocks by up to 8.4% a year.
If the portfolio manager and the corporate executive had the same major, they tend to overweight that stock 47% more than non-connected stocks and can earn excess returns of up to 16.05% annually.
“We know that information moves security prices, but we didn’t predict that there would be such a pervasive pattern between education networks and fund returns,” Cohen said.
“The social networks formed through education background, which are often established decades in advance, allow portfolio managers to gather information on firms,” she continued. “This is not an isolated situation or constrained to a few portfolio managers or firms; it’s a systematic effect across portfolio managers and firms.”