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Expert Analysis and Commentary
Larry Swedroe Mar 09, 2015
An interesting question is whether the assumed financial sophistication of mutual fund managers allows them to make better personal investment decisions than the typical individual investor. To find an answer, Andriy Bodnaruk and Andrei Simonov, authors of the 2014 paper (Do Financial Experts Make Better Investment Decisions?) compared the private investment decisions made by these financial experts to those of individual investors similar in a number of socio-economic characteristics, but presumably lacking in financial expertise. Their study covered the six-year period from July 2001 through June of 2007.
Bodnaruk and Simonov examined the personal portfolios of 84 mutual fund managers in Sweden (almost 40 percent of the all the mutual fund managers in that country) as well as the portfolios of their mutual funds and peer individual investors. The advantage of using Sweden for the study is that individual-level information on tax returns is publicly available from the Swedish Tax Authority offices. Thus, the authors had information on an individual’s real estate, total wealth and personal characteristics. The following is a summary of their findings:
The authors did uncover another interesting finding. They hypothesized that mutual fund managers, through the course of their investment work, are likely to have superior access to information and/or analysis about certain companies. Thus, to control for information differences, they split the portfolios held by managers into positions that are also held by the manager’s mutual fund (MF-related) and those which are not (non-MF-related). The authors investigated these positions separately.
They found that the non-MF-related investments of fund managers significantly underperformed their MF-related investments. This result suggests that a part of overall managerial performance should be credited to access to a mutual fund’s resources.
The findings from this study demonstrate that even a group of individual investors who have an extensive knowledge of finance gained through prior training and day-to-day experience with financial markets have a difficult time outperforming the market.
The evidence also indicate that neither mutual fund managers’ comprehensive knowledge of financial markets, nor their prolonged experience, is sufficient to provide them with enough of an advantage to enable them to generate alpha.
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Money Market Funds