The Career Paths of Mutual Fund Managers

For countless years, business owners and entrepreneurs have done their best to tweak incentives to get the optimal performance out of their employees. Obviously, people react to money, but to what extent money can provide an incentive to workers still causes debate among scholars. Other non-monetary benefits also motivate people. Again, though, the question is one of finding the right balance. A recent study provided by CFA Institute added to the literature on this topic by investigating how fund managers perform in relation to their pay and years of experience.

Specifically, this study looks into actual skill, or merit, and how it relates to pay for fund managers. As it turns out, evaluating the skills of fund managers proves less than obvious, as a number of factors contribute to the overall performance of a fund. Also, some posit that a manager’s reputation may actually play more of a role in determining pay than actual performance does. Finally, the researchers focus on how factors out of a manager’s control may influence their success or failure. The team also used different models, like the single-factor and four-factor models, to control for different variables.This study analyzed the careers of managers who had complete control of their funds. Researchers worked with data during the 1928 to 2008 period provided by Morningstar to see if a relationship exists between performance, pay and a sole management of a fund by a given manager. They also controlled for extreme performers by ranking the monthly returns of each fund from one to ten. In that way, for example, a fund manager who brought in a massive return in one particular month wouldn’t skew the results. Rather, that manager would simply be recorded as the highest performer that month.

Interestingly, the number of years on the job did show a significant relationship with performance, but with a few nuances. First of all, managers faced much more volatility early in their working lives, with a high percentage of turnover for managers of this level of experience. Those who made it past the 10-year mark actually did show better returns than their counterparts with less than 10 years on the job. However, when only comparing managers with 10 years or more of experience, researchers did not find much difference. At that level, avoiding failure seems to pay off more than performing better than other managers. Loss of complete control over a fund, though, was usually preceded by a drop in performance.

Overall, the study confirms that poorly performing fund managers don’t tend to stick around long. Those who do hang on for more than a decade do a better job, but not significantly better than others with similar experience levels. Therefore, managers benefit from avoiding risk and staying with the pack of fund managers in terms of performance. Both this study and previous studies suggest that some managers can retain their positions through the sheer power of a reputation earned when they began their careers. However, this remains an area of management science in need of further study.

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One response to “The Career Paths of Mutual Fund Managers

  1. Pingback: CFA vs MBA for a career in finance? | Alpha Banker·

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