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Rich and Co.

Oh oh! “…no evidence that financial experts are making better investment decisions: they do not outperform, do not diversify their risks better, and do not exhibit lower behavioral biases.”

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Managers do much better in (their own personal holdings) stocks (that) they share with their mutual funds (they manage); however, less than 1/3 of them have any (common) mutual fund-related positions. Interestingly, managers – particularly more experienced ones – seem to be aware about the limitations to their investment skills as they increase their holdings of mutual fund related stocks following bad performance of their portfolio. Our results demonstrate that day-to-day knowledge of finance does not improve investment decisions for investors with high level of general intelligence

  • We find that financial experts do not exhibit superior security-picking ability in their own portfolios.
  • Private investments of fund managers perform on par with investments of investors similar to them in terms of age, sex, education level, income, and wealth.
  • Even more striking, mutual funds managers’ investments perform more poorly than the private investments of the wealthiest 1% of investors
  • We find that non-MF-related investments of managers significantly underperform their MF-related investments.  This suggests that a part of overall managerial performance should be credited to access to mutual fund’s resources.
  • Financial experts also do not appear to be better than peers at diversifying risks. Managers invest a higher percentage of their wealth in mutual funds, but hold a similar number of individual stocks and exhibit similar levels of portfolio concentration. As a result, the Sharpe ratios of their investments are
    similar to those of control investors.
  • Nor do we find evidence that financial experts are less affected by behavioral biases. There is some evidence that managers exhibit a lower (in fact, negative) disposition effect, but only in MF-related positions. They also turn over their portfolios as often as control group.
  • Financial experts also do not appear to be better than peers at diversifying risks. Managers invest a higher percentage of their wealth in mutual funds, but hold a similar number of individual stocks and exhibit similar levels of portfolio concentration. As a result, the Sharpe ratios of their investments are similar to those of control investors.
  • Nor do we find evidence that financial experts are less affected by behavioral biases. There is some evidence that managers exhibit a lower (in fact, negative) disposition effect, but only in MF-related positions. They also turn over their portfolios as often as control group.

Our financial experts (mutual fund managers) are likely to have superior access to information
and/or analysis about certain companies gained in the course of their work. To disentangle the effect
of financial expertise from that of information advantage we conduct the following robustness analysis.

Interestingly, financial experts seem to be aware of their limitations with regard to their investment
abilities. Underperforming managers, especially the more experienced of them, subsequently
increase their allocations to MF-related positions.

(Value of Professional Investing to High Net Worth Clients)

…financial expertise is of little value for investors in the top decile by investable wealth. It is plausible that marginal effect of financial expertise on investment decisions is trivial for these investors, but is of larger importance for less well-off individuals.

…for highly sophisticated investors (defined as the top decile of population by financial wealth), expertise in finance does not improve investment decisions.…many high net worth individuals do not seek the services of investment advisors, but instead prefer to invest on their own. Wealthy investors appear to be as good individual investors as professional asset managers.  Low value added by investment advice for wealthy investors does not seem to justify the (hefty) fees.

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Returns by Position
This outperformance is particularly pronounced when we consider managers’ ‘‘best ideas,’’ i.e., positions that they share with their own mutual fund, but not with other funds in the family. In contrast, managers do not deliver higher returns per position than peers when their positions are not shared with mutual funds…Overall, managers underperform the wealthiest group of investors – by 14 bp per month, and do as well as investors in 95th–99th wealth percentile…positions that managers share with other funds in the family, but not with their own fund, exhibit the poorest performance of all groups considered.

Neither managers nor their peers are able to beat the market. While in both cases alphas are positive, they are not statistically significant at conventional levels. More important, managers do not outperform peers. In fact, going long in the managers’ portfolio and shorting the peers portfolio yields negative alpha; although economically very small and statistically insignificant…results do not support a conjecture that fund managers excel in market timing.

..comparing the abnormal performance of managers relative to wealthy investors: The results are even less flattering for managers; going long in portfolios of managers and shorting portfolios of the wealthiest 1% of investors delivers negative alpha of between 28 bp and 45 bp per month which is statistically significant at 5% level. Performance attribution analysis shows that the outperformance of the wealthiest 1% is actually related to stock selection and not market timing.

The abnormal performance of managers relative to investors in the 95th–99th wealth percentiles is also negative, although neither statistically nor economically significant. So far our results indicate that, in general, managers do not possess superior stock picking ability…

…we find that managers do much better investing in securities that they share with their mutual funds than in securities they do not; the difference in monthly abnormal returns is 54 bp per month for the one-factor model and 58 bp per month for multifactor models, both are significant at the 10% level.

Interestingly, the outperformance of the MF-related portfolio appears to be driven by market timing. The economic effect of market timing is 1.1% per month for Treynor–Mazuy estimation and 0.9% per month for the Henriksson–Merton estimation.

….Managers perform much better – by 91 bp per month – in the positions that they share with their mutual funds than in positions that are not held by their funds, but that are held by other funds in their mutual fund family. This outperformance is limited, however, to managers’ ‘‘best ideas,’’ i.e., positions that are shared with their own funds, but not other funds in the family.

Diversification and Sharpe Ratio – managers are no better at diversifying their risks and obtaining superior reward per unit of risk than non-financial experts.

…managers allocate a lower fraction of their portfolios to individual equities than matched investors and the wealthiest 1% of investors, but a similar fraction as investors in the 95–99% wealth bracket. [Note, so the wealthiest take more “equity” positions when investing.]

However, they hold a similar number of stock positions, and their portfolios exhibit a similar degree of concentration as peers. Moreover, according to these two measures they are underdiversified compared to both groups of wealthy individuals. As a result, portfolio Sharpe ratios for managers are not only indistinguishable from Sharpe ratios for matched investors, but also both statistically and economically much lower than for wealthy investors.

Behavioral Biases – managers do not seem to be less prone to behavioral biases than non-financial experts with similar characteristics…fund managers exhibit a lower disposition effect – both overall and in stocks only – than matched investors, but not than groups of wealthy investors…the lower disposition effect comes from MF-related holdings, while there is no statistically discernible difference in the disposition effect in non-MF-related positions of managers and overall portfolios of comparison groups.

Portfolios of Managers and Portfolios of Mutual Funds of Managers – managers make better decisions with respect to positions they share with their mutual funds.

…managers are about equally likely to invest in the stocks that are held only by their mutual funds as in the stocks that are held not only by their own funds but also by other funds in the same group; the amounts of money they invest in such positions are also comparable.

…Managers also prefer to invest in domestic securities, mutual funds, and securities widely held by general population, but avoid volatile assets. They also load more strongly on stocks and mutual funds that performed well recently and those that continue to do well in the near future.

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Written by Rich and Co.

November 5, 2015 at 3:26 pm

Posted in Uncategorized

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  1. […] (Total Return) see also No evidence that financial experts are make better investment decisions (Rich and Co.) • Goldman: This Is How S&P 500 Companies Will Use Their Cash in 2016 (Bloomberg) see […]


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