‘Fund Manager of the Year’! To many people looking for a good investment a fund manager that has won an award would sound like a great place to start. But is it? Would you believe that investing with managers that have just won a prestigious award like Fund Manager of the Year (FMOY) has, on average, resulted in underperformance of over 3% a year!

 

That’s the finding of Dr Eric Tan of the University of Otago, and his colleague, Dr Jerry Parwada, Head of the School of Banking and Finance at University of New South Wales.

 

How did they reach this seemingly counterintuitive conclusion?

 

They looked at the evidence and what they found was fascinating.

 

Organisations such as Morningstar present such awards as their ‘Fund Manager of the Year’ at expensive gala dinners, and what fund manager doesn’t want to win an award?  It gives them a distinct marketing advantage and a prestigious third party endorsement of their management acumen and style.

 

But what the study showed is that this does not always translate into benefits for investors, many of whom are more likely to invest because of the award.

 

Tan and Parwada’s study looked at fund managers that won the FMOY award in the US stock category from 1995 to 2012.  Their findings were published in the paper, “Superstar Fund Managers”, which was presented in December 2016 at the 29th Australasian Finance and Banking Conference.

 

The following chart shows average performance after the award was won.  The red bars show the average alpha (in layman’s terms this is performance that is usually attributed to a manager’s skill (although many would call this luck)) achieved after the win – note that most of the red bars are negative.  In other words, winning funds performed worse than average after winning the award.

 

 

Dr Tan summarises his findings in a single number.  “Award-winning managers on average underperform by 3.08% in the 12 months following the announcement of the FMOY award.”[1]

 

These findings undermine the idea that the alpha contributing to the FMOY award was to do with skill and to make matters worse, the also study found that award-winning managers often increase fees after winning the award, meaning new investors get below average returns and pay a higher fee for the privilege.

 

This study is just one more reason why we follow an evidence based investment process.  We never allow recent performance to guide why we select or replace a fund manager.  Recent performance may help you win an award, but it’s no guide to future performance!

 

Instead, at Momentum, we will spend our time learning about you and your specific financial and investment needs, combining your personal values and financial goals, time frame and tolerance for risk into a plan and an investment solution that is designed to meet your specific needs,

 

Whilst this might not be especially flashy, we think that planning an investment solution that is tailored to each investor rather than just recommending the most recent flashy award winner, allows us to provide investors with a much better overall investment experience.

 

[1] http://www.otago.ac.nz/accountancyfinance/study/profiles/otago639066.html