Does Firing Money Managers Lead to Improved Performance?

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Does Firing Money Managers Lead to Improved Performance?

Larry Swedroe Jan 13, 2016

The Study’s Key Takeaways

  • There’s a dramatically stronger inverse relationship between subadvisor departures and lagged returns.
  • The turnover-lagged performance relationship is that return performance lagged up to five years predicts departures. Firings don’t tend to occur because of short-term (one- or two-year) underperformance.
  • There’s no evidence of improvement in return performance related to departures. Manager turnover has no effect on future return performance, regardless of the horizon examined.
  • Fund flow improvements are associated with the departure of poor past performers. Turnover is associated with economically significant increases in future flow for poor past performers, and especially for subadvised funds. This suggests that investors pay attention not only to past returns, but to management changes as well. This evidence is also consistent with rational action on the part of fund boards, so long as manager identity is relevant to investors, even though turnover doesn’t lead to improved return performance. Boards appear to closely monitor performance in part because investors chase returns and expect an improvement if management of a poorly performing fund is changed.

The Bottom Line

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