Investment Managers Are Human Too

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Mutual fund managers would seem to possess myriad advantages over the average individual investor: a business degree, a deep understanding of corporate finance, and years of experience.

But you wouldn’t know it based on how their personal portfolios fare.

A new study of mutual fund managers in Sweden found that that they “do not exhibit superior security-picking ability” when managing their personal portfolios, compared with similarly situated private citizens who also invest for themselves.

Using detailed tax and investment information contained in Swedish government data bases, researchers from the University of Notre Dame and Michigan State University were able to link individual fund managers to their personal equity portfolios and returns, which were then compared with the returns of non-experts with similar socioeconomic characteristics, such as education and age.

Based on the risk-adjusted returns for each group, the researchers found that the fund managers’ personal equity portfolios – individual company stocks and also the stock mutual funds they hold – performed no better than the private investors’ equity portfolios.

In one, and only one, case the mutual fund managers did much better – nearly 1 percentage point better. This occurred when the researchers conducted a more limited comparison only of the equities that the managers selected both for their own portfolios and for the fund portfolios they manage in their jobs. But the remaining equities in their portfolios did not outperform their peers’ overall portfolios.

In another case the mutual fund managers lagged. Their equity portfolios did not do as well as those of private investors in Sweden’s top 1 percent in terms of wealth – a different group of investors than the original comparison group. The researchers did not provide an explanation, but their analysis did show that this difference was due to the selection of individual equity investments – and not market timing.

This study provides further justification for investing in index funds that track a stock market index, charge much lower fees, and, by definition, don’t claim to beat the market.

James McRitchie

It also makes me think investors should spend more time trying to influence the companies they own, rather than on market-timing and stock-picking.


But the study doesn’t take into consideration the exact objective of the fund managers. Perhaps they were, in effect, hedging their own human capital? Without perfect knowledge of why the personal investments were allocated as they were, how can we conclude that the study provides further justification for index funds?

Moshe Milevsky has published a great deal on this topic

Ken Pidcock

“This study provides further justification for investing in index funds…” Right. But I’ve never been clear on why the indices, representing a large number of stocks, should be expected to move. I understand factors that influence the price of individual stocks, but why should they, in effect, follow one another to the extent they do?

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