Experience outside of the investment world can boost a fund manager’s performance, research has shown—as long as they invest in the area they once worked in.
The findings were published by Gjergji Cici, Monika Gehde-Trapp, Marc-André Goericke, and Alexander Kempf, in a paper titled “What They Did in Their Previous Life: The Investment Value of Mutual Fund Managers’ Experience Outside the Financial Sector”.
“Our findings suggest that when managers make stock picks from their experience industries or when they time the returns of their experience industries, they perform well.”The quartet studied 130 US-based mutual fund managers. For each manager, the researchers separated out stocks related to industries in which the manager had worked, and stocks from other “non-experience industries”.
“We find that portfolios mimicking holdings from the fund managers’ experience industries earn significantly higher risk-adjusted returns than portfolios mimicking their holdings from non-experience industries,” the researchers wrote.
The outperformance was found to range from 3% to 5% over a 12-month period, while “portfolios mimicking holdings from non-experience industries earn risk-adjusted returns that are not consistently different from zero”.
The researchers also found that managers were also better at timing investments in their experience industries. Managers increased their industry weights prior to strong returns over a subsequent 12-month period, and decreased prior to weaker performance, “in a significantly stronger fashion in their experience industries”.
The authors said this evidence “clearly documents the investment value of industry work experience”.
“However, portfolio managers are given mandates to run diversified portfolios, which might restrict their ability to utilize their prior experience to the fullest,” they wrote.
The researchers argued that fund management companies should either relax investment restrictions for some managers or “give these managers mandates to run sector funds that primarily invest in their experience industries”.
“Following such a strategy would allow these managers to make greater use of their experience in their portfolio decisions,” they concluded.
You can access the paper here.
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