Longtime fund managers are improving their skills but are still not performing as well as newer members of the asset management industry.
This conclusion was drawn from a new study conducted by three public finance professors for the National Bureau of Economic Research. The authors of the report, Lubos Pastor from the University of Chicago along with Robert Stambaugh and Lucian Taylor from the University of Pennsylvania, examined more than 3,000 actively managed stock funds between 1979 and 2011. They found in their research, which factored out asset size, that actively managed stock funds less than three years old beat their benchmark by roughly 0.9% more than funds at least 10 years old.
Half of actively-managed funds less than three years old outperformed their benchmarks in January 2014, according to data provided by Morningstar. This compares to 49% of funds greater than 10 years old who outperformed their benchmarks at 49% during the same month.
Professor Pastor, who has been teaching at the University of Chicago Booth School of Business since 1999, says younger U.S. stock mutual funds are faring better than their older counterparts thanks to newer money managers incorporating fresher market strategies combined with increased educational knowledge. He says while veteran fund managers are "learning on the job" and improving their skills, this is often offset by added competitors and thus does not translate on trading floors.
"Managers have become more skilled over time yet their performance has not improved," says Pastor, a research associate with the NBER and Centre for Economic Policy and Research. "This is due to increased competition."
Improved education and a greater command of new technology have helped newer funds entering the industry often be more skilled than incumbents, according to Professor Pastor. He said as a result recently-formed funds are more likely to pursue the latest investment strategies that have enhanced chances of outperforming the market.
The NBER report showed that younger funds outperform older ones in a typical month. Funds between three and six years old also surpass older funds, according to the study.
The researchers chose 1979 to 2011 as the period tracking mutual performance since this was a period the industry "grew dramatically", according to the report.
Education Factor
Pastor urges older fund managers to be proactive with educating themselves on latest investment insights in order to stay up with those new to the asset management space. He also encourages fund companies to hire fresh talent into leadership roles and says not enough are doing so.
"They need to stay in touch and follow the latest academic literature, the latest industry inventions," says Pastor. "As time passes more and more MBA students start new funds and they have been exposed to more cutting edge research."
Aaron Izenstark, co-founder and Chief Investment Officer of Chicago-based IRON Financial, says he encourages his asset managers take continuing education classes to help them stay ahead of the curve. He also recently hired a recent University of Chicago Booth School of Business MBA graduate and feels having a solid mixture of experienced managers and newcomers is a winning approach.
"We actively promote taking continuing education and improving their skills," says Izenstark. "It definitely helps being aware of the latest trends in the industry."
"If you get your MBA in 2014 you are getting the latest scoop on how to beat the market," Pastor explained. "The people starting new funds are further ahead."
Another factor cited in the NBER research in the aiding the performance of newer funds is them charging higher fees. Pastor says fees are a factor but he downplayed its impact on performance.
Izenstark says mutual fund managers running younger funds should be boosting their marketing programs to convey their success to investors.
"It is human nature for people to want to get on the ground floor of something hot," says Izenstark. "It's definitely good business because investors eat this stuff up."
The NBER report says new questions were raised from the research that may be explored in a future study including expanding on whether education and technology are driving an upward trend in average skill of fund managers. Another issue the researchers say they may tackle is whether active funds perform better in countries with smaller active management industries.
