(PUB) Investing 2015

Manager Investment Brings Better Results Continued From Cover

2

If we look at a risk-adjusted success rate, the story is fairly similar. We found a risk-adjusted success rate of 28% for managers with no investment compared with 39% for those with $1 million or more. Looking at asset classes, the trend was pretty consis- tent. In U.S. equities, funds with no investment had a dismal 29% success ratio versus 39% for the top rung. Attrition was higher in U.S. equities coming out of the bear market. For international funds, those with zero investment had a 32% success ratio versus 68% for those with more than $1 million invested. Balanced funds had a 32% success rate on the bottom rung versus 85% on the top rung. Manager investment worked less well for sector funds and taxable-bond funds, however. For sector funds, the group with no investment had a 39% success ratio while the over $1 million group had a 40% success ratio. The highest two rungs in sectors were pretty sparsely represented as just 10 funds and 16 funds were represented at the start of the period. So, it could be that there just isn’t enough data. For taxable bonds, the top performers were in the middle of the invest- ment range. However, the number of funds in the top two groups was fairly small again. If there’s more going on than a lack of data, I don’t have an explana- tion for why these two asset groups defy the manager investment trend. Municipal bonds showed a positive trend for moving up in investment level, but like the figures for sector funds and taxable-bond funds, the limited amount of data leads me to avoid conclusions. Muni funds in which managers invested more than $1 million had an 80% success rate, but that comes from a mere five funds. Why the Predictive Power? There are likely some direct and indirect effects going on here. No one knows a fund better than its managers and naturally they can evaluate it well for their own needs. They can evaluate people and process and are savvy investors when it comes to fees. So they are more likely to buy low-cost funds as we saw in previous studies. If a fund has high costs, they might invest in some other vehicle such as a separate

Predictive Power of Manager Investment

Success Rate ( % )

Success Rate MRAR ( % )

Broad Group

Bucket

U.S. Equity

$0

28.99 28.74 29.65 33.52 36.52 31.86 39.08 31.52 52.17 34.69 48.57 45.71 43.75 67.86 31.65 21.43 52.63 76.92 50.00 64.29 84.62 41.67 35.29 40.24 56.86 55.45 47.06 42.31 34.85 36.24 35.52 43.25 42.55 40.31 46.74

23.63 26.44 23.26 25.14 29.97 27.43 33.19 26.08 43.48 24.49 34.29 37.14 37.50 50.00 28.06 21.43 47.37 61.54 47.37 42.86 73.08 37.59 23.53 30.49 43.14 35.64 35.29 42.31 28.18 30.28 25.30 33.13 33.60 33.16 39.16

$1–$10,000

$10,001–$50,000

$50,001–$100,000

$100,001–$500,000

$500,001–$1,000,000 $1,000,001 or greater

Intl Equity

$0

$1–$10,000

$10,001–$50,000

$50,001–$100,000

$100,001–$500,000

$500,001–$1,000,000 $1,000,001 or greater

Balanced

$0

$1–$10,000

$10,001–$50,000

$50,001–$100,000

$100,001–$500,000

$500,001–$1,000,000 $1,000,001 or greater

Taxable Bond

$0

$1–$10,000

$10,001–$50,000

$50,001–$100,000

$100,001–$500,000

$500,001–$1,000,000 $1,000,001 or greater

All Funds

$0

$1–$10,000

$10,001–$50,000

$50,001–$100,000

$100,001–$500,000

$500,001–$1,000,000 $1,000,001 or greater

rate. Because about one third of funds were merged away or liquidated over that five-year stretch, a 47% success rate is actually quite good.