Why Manager Tenure Doesn’t Matter

How important is experience in investing?

A recent study from the Cass Business School in London sought to discover whether active managers with long tenures outperformed their less-experienced peers.

“Fund managers with at least 10 years of experience might be able to generate positive benchmark-adjusted returns for investors over time,” argued Andrew Clare, professor of asset management at Cass.

An analysis of 357 US equity managers using Morningstar data found that those with at least a decade of experience as of December 2014 earned almost 50 basis points in excess returns per year net of fees over the 10-year period.

These results, however, should be taken with a grain of salt: “Of course there is an element of survivorship bias here,” Clare warned. “Presumably managers with a good track record are more likely to stay in their role than those with a poor one.”

On top of that, Clare found that performance was fairly dispersed, with just over 60% of the experienced managers outperforming their benchmarks on a net-of-fee basis. Managers also appeared to decline in performance over the decade studied.

“It is possible that as these managers matured further that their appetite for risk declined,” Clare said.

Overall, the study offered no conclusive evidence that long-tenured investors consistently performed better than newer peers.

“Although their average performance over the 10-year period was relatively good, from year to year there was little evidence of performance persistence,” Clare wrote.

However, there may be a few characteristics that would make more experienced managers more likely to outperform.

Managers who charged lower fees, were biased toward small-cap equities and against value stocks, and held more concentrated portfolios tended to deliver better risk-adjusted performance, Clare said. 

Read the full report, “The Performance of Long-Serving Fund Managers.”

Related: #48 Youth & #47 Experience