When you oversee a database of 16,000 portfolio managers globally, people tend to have a lot of questions about the trends you see and the lessons you learn.
One of the most common questions I get is whether a portfolio manager’s experience makes a difference when it comes to their ability to outperform.
It’s logical to suggest that it does. In most walks of life, the more you do something the better you get at it. Given that the faculties of most fund managers don’t deteriorate with time, then that experience should tell. But the reality is that external pressures on fund managers are numerous: accumulation of assets, the pressure to succeed and the threat of passive products, to name but a few.
To answer this question, I looked at the track records for every single fund manager we have followed since Citywire started out. We began tracking individual fund managers back in 1999 and today we track 16,000 active managers in 42 countries around the globe.
Our first data point stretches back to 1964, which gives us a good mix of historic and current track records to examine when considering the likelihood of portfolio managers outperforming at different stages of their career.
The first thing to highlight is how unlikely a fund manager is to get a long-term track record. Just 45% of fund managers reach their five-year track record in a category and less than a fifth (17.5%) reach the milestone of a decade. Two decades of experience in a peer group is even rarer; 98.4% never reach that level of experience.
So what is the likelihood of a fund manager outperforming in their first year, second year, third year and so on?
Based on historic numbers, the likelihood of a manager outperforming in their first 12 months is 39.3%, which increases slightly to 39.6% in year two. Over the first couple of decades there is an improvement, with the probability of outperformance spiking as high as 42.5% in year 17. While these figures do not make a compelling case for active management, one thing they make clear is that the more experienced a manager is, the more likely they are to outperform in a chosen market. This is a pattern that remains the same even if you look at discrete three-year periods of a manager’s career.
Another thing you cannot discount is that these numbers have been influenced by how hard it has been to outperform in the post-credit crisis period. But it would be misleading to ignore that this period has changed things.
One interesting note to add is the surprising results of comparing equity and fixed income managers. Historically, equity managers have been 10% more likely to outperform in their category than those running fixed income funds, who have outperformance rates of around 30% in their first decade. This runs counter to my expectation that bond managers had it easier, so swayed was I by the recent outperformance numbers in fixed income. It would seem to justify the old adage that bond investing is an old person’s game.
These numbers are unlikely to convert many investors to the virtues of active management, but they do highlight the likelihood of a more experienced fund manager outperforming a relative novice.
Next time, I’ll be digging deeper into this data to compare the careers of those managers who start out well with those who had a tougher time.