Have you ever wondered what happens to portfolio managers when they stop running mutual funds?
Citywire currently tracks more than 15,000 portfolio managers. Since we began doing so 17 years ago, almost that many have left the industry – 12,000 to be precise.
So what happened to these people, and why are they no longer making the all-important decisions?
In order to glean some insights into the reasons for these departures and where these managers end up, we took a random sample of 100 portfolio managers who are no longer active and dug a little deeper. It's a sample size large enough to reach some conclusions, but not statistically rigorous enough to bet the farm on. Not that you would.
On average, the tenure of these managers on their funds was just 50 months, or just over four years. That was how long it took them to prove their worth to investors and employers, or to realize that they were in the wrong career.
Perhaps unsurprisingly, the overwhelming majority of these managers underperformed across their tenures, with 74% percent falling short of their Citywire assigned benchmarks. Just 22% outperformed across all of their funds and the remaining 4% were up on some and down on others.
It might seem obvious to say but these are bad numbers relative to the whole population. Consider this: they would be bad even over the past three years – a period which includes two of the worst years on record for active manager outperformance, with just 27% of managers worldwide adding value. On average, this random sample of fund managers stopped managing retail money five years ago. Over the three years to that point, outperformance rates had been much closer to 50% worldwide.
It's not surprising that these managers were punished for underperformance. Asset management is a results-driven business and it can be ruthless.
That ruthlessness also extends to what happens to the portfolios once managers depart. A quarter of the portfolios run by the 100 managers closed within three months of their departure. Of those, all but of one of the funds had underperformed during the outgoing manager’s tenure. Winding down a fund is not a decision taken lightly, but its relative frequency speaks to an industry that likes to distance itself from its mistakes.
As a result, the departing PMs struggled to get another comparable job. While 49% stayed in portfolio management, they left our universe, meaning they were either no longer named on funds or joined strategies with teams of more than four named PMs, suggesting diminished decision-making responsibility. Less than a fifth – 19% – joined another asset manager in a non-PM position.
The majority went to financial positions in more general companies, such as strategists at supermarkets and heads of risk for insurance companies. The most colorful occupation was a gentleman who started up a wine company, and of course there were those who retired.
Those who remained in some kind of fund management were more likely to have outperformed previously; 14% versus the 8% who left asset management completely.
Those who stayed at the same shop but stepped away from running money had better outperformance numbers than those who left entirely, but not markedly so, with 69% underperforming versus 81%. This reflects the more human side of fund management. Relationships matter, but so do the practicalities of running an asset manager: it costs a lot to hire and train talent from outside.
Interestingly, if your fund was one of those that closed, you were much more likely to leave the company than those whose funds remained open (55% versus 40%).
An overwhelming majority of the outperformers who moved away from running money also left their employer. One suspects that it was for entirely different reasons though: their skills were still valued and put to use at other firms.