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Study Highlights Ingredients that Produce the Most Persistent Portfolio Managers

There’s no replacement for experience. This is what a study concluded when it compared Investment fund managers varied attributes, including whether they held a Chartered Financial Analyst (CFA) designation. Even the CFAs did not shine relative to those with longer tenures as fund managers. There are likely reasons for these findings which don’t in any way diminish the CFA designation. The designation is considered by many to be the most difficult to achieve in the financial industry. It denotes a high level of competence in understanding accounting, economics, ethics, money management, and security analysis. The comparisons and conclusions of the study could help advisors and self-directed investors that invest all or part of their portfolios in funds.

As part of the study, researchers reviewed the careers of more than 6,000 managers. They found that those with the most persistent high performance were more often the portfolio managers with the most experience in the market. The average of those with a CFA charter did not have the same level of persistent performance as the average experienced fund manager. Bloomberg wrote about the study saying, “Fund managers with a Chartered Financial Analyst qualification are less likely to perform well over long time periods than those who haven’t taken the famously tough exams,”

About the CFA

Those that have earned the CFA designation have succeeded to earn one of the most difficult qualifications in finance. The pass rate last July for the lowest level of the three required tests was only
25%. The second and third level tests require even more competence and understanding of all the disciplines necessary for financial analysts. Candidates on average, study 300 hours for each level and take four years to complete the series.

About the Study

Researchers from Bayes and Cork University Business School examined 6,291 U.S. equity mutual fund managers’ careers, tracking their performance across various funds and companies as well as examining factors such as gender, qualifications, and whether the manager was invested in the fund. Previously, similar studies have looked mostly at managers’ performance while working for particular funds.

The results showed accumulated wisdom has a positive correlation with a portfolio manager’s overall skill. The data also indicates that experienced fund managers run portfolios that have lower exposure to the market, smaller individual holdings, and momentum risk factors. The Bayes and Cork University study found evidence that when a manager has a stake in a fund, they tend to have lower exposure to risk. According to the conclusions, results “identify performance persistence as being most prevalent among managers with certain characteristics, such as managers without a CFA qualification,” since correlation is not necessarily causation, it is important to note that many more finance professionals are attaining the designation to advance their careers. This may more heavily include less experienced CFA holders. As the study points out, “Long time experience as a characteristic is particularly important in explaining many of the findings relating to persistence.” In terms of field of study, the research did find more persistence among managers who came from universities with higher entry requirements and those that earned more technical degrees like math and physics.

Take-Away

What makes a good fund manager, school, gender, CFA designation, experience level, field of study? Researchers at Bayes and Cork University tracked performance against various traits including tenure, credentials, and even whether the manager was invested in the funds they managed. The one factor that appeared to impact good long-term performance was experience. The reasons for this could be that by the time you reach a certain number of years as a manager, if you weren’t average or above, you would have washed out regardless of anything else you brought to the desk.

Paul Hoffman

Managing Editor, Channelchek

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