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Expert Analysis and Commentary

Larry Swedroe: Management Tenure and Mutual Fund Performance

Larry Swedroe Oct 13, 2014

If the length of a fund manager’s tenure is related to their ability to provide superior performance, then it should be a factor in explaining the size and persistence of fund returns. Unfortunately, as is true with much of the “conventional wisdom” about the mutual fund industry, the data simply doesn’t support the belief.

Management Vs. Performance

They began by focusing on the careers of mutual fund managers who are in sole control of their funds. To avoid the problem of survivorship bias, their study covers the period from 1996 through 2008. The data set incorporated 2,846 funds and 1,825 managers, and included 195 funds with managers that had at least 10 years of experience (6.9 percent of the total). Their research resulted in three key findings:

  • As we would expect, turnover is, at least in part, related to performance. Poor performance does lead to firing.
  • In any given year, even the longest-surviving solo managers are unlikely to produce significantly more positive style-adjusted monthly returns than negative ones.
  • While longer-tenure managers outperform their peers, they show no ability to deliver alpha, or outperformance relative to their risk-adjusted benchmarks.

The authors concluded: “The key to a long career in the mutual fund industry seems to be related more to avoiding underperformance than to achieving superior performance.”

Repeat Performance?

The Bottom Line

The bottom line is that this study provides further evidence against active management as the winning strategy. Rather, the winning strategy is to use passively managed funds to implement your financial plan. Passively managed funds, as a category, include not just index funds, but also funds whose construction rules are transparent, systematic and based on historical evidence.

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