How the economic conditions at the time a fund manager begins their career influences their performance
Study asks whether fund managers whose skills and experience were forged in a time of recession, make better investments.
The mutual fund industry plays a very important role in the US economy, with millions of individual investors holding trillions of dollars in mutual fund assets, and with a majority of investors viewing the industry favourably. To some, both the huge investment and the industry’s favourable perception are perplexing, given evidence of actively managed funds’ underperformance relative to the market. However, despite the struggle to consistently outperform the index, some active managers do achieve success. Therefore, understanding the factors that explain the cross-sectional differences in fund performance is a key issue for both academics and practitioners.
Several studies have shown that managerial characteristics such as educational background, gender, and age are related to performance outcomes. In the paper Recession managers and mutual fund performance, the authors extend this line of research by considering the economic environment at the time a fund manager initially entered the labour market, and ask whether this influences management style and fund performance.
Studies indicate that the beginning of an individual’s career is a critical and sensitive period. Therefore, individuals are likely to form their professional mindset during this period, to the extent that their subsequent behaviours bear the stamp of the environment.
Using a sample of 960 unique fund managers from 1990 to 2016, the paper finds that economic conditions present when a fund manager enters the labour market significantly affect their fund performance.
The study find that fund managers who began their careers during recessions produce superior returns compared with their non-recession counterparts, and this relation becomes more prominent during recession periods (although they do not demonstrate better stock picking in boom periods).
WIth their formative career experience in mind, it might be expected that recession fund managers be more conservative in risk taking, and the study finds that recession managers do tilt their investments towards defensive, rather than cyclical, industries during and before recession periods.
Overall, the findings support the argument that the economic conditions under which an individual initially entered the labour market exert a long-term impact on their career outcomes and decision-making.
The paper Recession managers and mutual fund performance has been published in Journal of Corporate Finance. The accepted version of the paper is available for download at City Research Online.
