Are investors better off choosing superstar fund managers?
University of Otago Business School accountancy and finance researcher Dr Eric Tan found this isn’t necessarily the case.
“You might think that when a fund manager wins a performance award, the investment fund they manage would do even better.”
But Tan said the winning funds enjoyed disproportionately large new money inflows, and this sharp increase in investment made the fund suddenly harder to manage.
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The phenomenon echoes the problem that sunk South Canterbury Finance, although for a different reason – investors piled money into the company after the government guaranteed deposits in 2008.
Brian Gaynor, executive director of Milford Asset Management said he had never noticed a flood of money after an award and didn’t think investors paid much attention to them.
Gaynor said Tan’s research referred to Morningstar awards in the US which attracted considerable attention through media sources, including Bloomberg, Business Week, CNBC, Forbes, Reuters and the Wall Street Journal.
“We don’t have those media outlets in New Zealand and that much coverage.
“The local Morningstar awards are very low profile and attract little media attention,” Gaynor said.
Tan studied the US Fund Manager of the Year awards, one of the most important in the industry to recognise fund managers with a track record of performance.
He said such an award bestows “superstar” status on the fund manager, but until now little was known about the consequences of being a superstar fund manager.
Tan’s study looked at fund managers who won the FMOY award in the domestic shares category from 1995 to 2012.
He analysed the effect of money managers’ status on the subsequent money flows, performance, compensation, and risk-taking behaviour.
He found investors responded predictably to the superstar status by investing more heavily up to six months following the FMOY award.
However, frequently it drove down the fund’s subsequent performance. Award-winning managers on average underperformed by 3.08 per cent in the 12 months following the announcement of the FMOY award.
“The effect can last for as long as three years before bouncing back.”
Tan also found award-winning managers extract higher compensation after receiving the award.
The study also showed winning is not associated with higher risk-taking behaviours managers than their non-winner counterparts.
Tan said he was keen to see if these findings were similar in Australia and New Zealand investment funds.