WSJ: Mutual Fund Manager Experience and Performance

Fund investors often debate: Should I entrust my money to an experienced fund manager with a record over many different market cycles, or should I go with an upstart manager who might have fresh ideas on how to generate gains?

My research suggests that if you want a fund that will track an index better and provide superior posttax returns, the more-seasoned fund manager is likely your best bet. If, on the other hand, you are looking for outsize bets and potential home runs, a short-tenure manager may be the way to go.

To examine the relationship between fund-manager tenure and performance, my research assistant, Ioana Baranga, and I collected data on all actively managed mutual funds between 2010 and 2020. We then partitioned all fund managers by their tenure at the fund, using a range of zero to three years to define “short tenure” managers, and six years and greater to define the “long tenure” managers. If there were multiple fund managers within the same fund, we opted to use the oldest fund manager’s tenure to define our partition.

Next, we explored how these fund managers differ in their returns and investment decisions. The results associated with managers in the large-cap U.S.-stock category highlight the results well. On a pretax basis, the average long-tenure manager underperforms the average short-tenure manager by 0.03 percentage point a year (12.39% average annual return for long-tenure managers versus 12.42% average annual return for short-tenure managers). Yet this result flips when we examine posttax returns — it is actually long-tenure managers outperforming short-tenure managers by 0.14 percentage point a year, on average (9.15% average posttax annual return for long-tenure managers versus 9.01% average posttax annual return for short tenure managers).

Read the rest at:

https://www.wsj.com/articles/should-you-invest-with-experienced-fund-managers-11636056230