Revealing the full costs of investment management, for example, is not exactly a new issue – Alan Miller, Fidelity and the IMA have all had their say on this in the past few weeks – so it is too easy to bang the “active managers are overpaid and over-charge for under-performance” drum.
But what is new is the combination of an outstanding organisation such as Cass Business School and the equally well-respected FTfm getting together to publish research that they claim “is likely to fan the flames of the debate over the degree of skill fund managers possess”.
It will do nothing of the sort.
For a start, it is patently obvious that it is a US study – phrases like “home-field advantage” are a giveaway – with the research looking at trades over $200,000, made between 1980 and 2009, in the US stock market by US mutual fund companies, US banks and US insurance companies.
The research asked whether there is any robust evidence of superior stock selection by money managers in their own industry.
It couldn’t find any.
It added: “Seen against the backdrop of previous studies that have shown evidence of fund manager ability, a lack of evidence of skill in own-industry trading is clearly a surprising and thought-provoking result.”
No it isn’t.
Lack of context
While it does say: “The idea that in expert hands public information can be used to beat the market is intuitively appealing, and is the reason behind the proliferation of so-called ‘expert network’ firms.
“However, we show that for several important industries in the financial services sector, greater industry expertise does not translate into superior investment returns.”
What it does not say, either in the FTfm article or the originating statement, is why this is the case. Rather than examining the findings, it seems to leap to the conclusion that those making the transactions do not show the “superior stock selection” they should do compared to their competitors.
If those making the transactions are the “experts” that Cass claims them to be, then maybe the fault lies with the information they have to analyse and the way it is communicated. As with those trying to compare funds, perhaps the information is not clear or transparent enough for even the experts to fathom.
The editorial philosophy behind Portfolio Adviser when analysing any investment topic is to summarise the issue and then ask “So what?”.
So I would challenge Cass Business School to do the same – now you have identified that fund managers do not make better investment decisions when it comes to their own industry, “So what?”.
