Hi Guys,
There are numerous investing behavioral biases that ruin our overall portfolio performance. Only identifying negative impact factors disproportionately increases our fears and likely contribute to us embracing a more conservative approach than is warranted by market conditions or our long-term goals.
We need some positive reinforcements. More than a few investors have fallen behind their personal saving for retirement power curve, especially when considering historical market return averages. Even if these averages are repeated in the near future, the retirement portfolio shortfall will persist.
A more aggressive approach is signaled. That suggests that some portion of the portfolio should be committed to active fund management. However, most active managers fail to match Index returns; but some do and generate positive excess returns. The key is to develop screening criteria that recognizes these winners.
How do we find these superstar performers? Certainly we seek fund managers who have registered positive excess returns during a major portion of their investment career. No manager outdistances the markets each and every year.
Some industry research has indicated that even the most successful fund managers only outscore their benchmarks about 70 % of the time. Nobody is perfect; a 70 % record is exceptional even for a Warren Buffett-like manager. Individual past performance does matter although it does erode over time as market conditions change.
Also, low fund fees and low annual portfolio turnover rates are traditionally strong signals for potential mutual fund outperformance. This is not new news, but are necessary components to a disturbingly short selection criteria list. We seek a wider criteria diversity to choose more wisely.
Some professors from middle America universities provide an additional candidate set based on their extensive research. In that research, they demonstrate that mutual funds that are guided by leaders who have earned financial PhDs yield higher annual returns than those that are controlled by non-PhD educations. The findings are statistically meaningful. Further, they find that those PhDs who have published extensively in respected journals add incrementally to the excess rewards.
Here is the Link to the study:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2344938I extracted the reference from the CXO Advisory Group website, The CXO team asked the following question: “Do Ph.D. Holders Make Better Money Managers?”. CXO answers “Yes” to that question. The CXO assessment is restricted to their membership ranks so I referenced the paper itself.
Although I have only read the Introduction and the Conclusions sections of this academic work, the study appears to be comprehensive and credible. Enjoy and profit from its findings. It provides yet another needed fund selection criteria to a rather short set. It should facilitate the sorting quagmire.
Let me close with a cautionary warning. Obviously, the research is statistical in character. Exceptions exist with a Bell-like shaped distribution. Yes, on average, PhD leadership moves the rewards average in the positive direction. But there are some PhD managed funds that are persistent losers. A few of these are disasters, like the Titanic increasing speed through the ice flow field.
Like doctors, all financial PhDs are not equal. Exceptions always exist, but PhDs do appear to boost returns. In the complex investment world, absolute guarantees are nearly impossible. The MFO membership can readily identify several of these exceptional loser PhDs.
Best Regards.
Comments