New research shows that there is a set of quantitative indicators that can help investors determine the likely future performance of their fund managers.
The study, which was conducted by Professor Andrew Clare of Cass Business School and co-authored by Mariana Clare of Imperial College, was supported by Spain’s Inversis. It uses a comprehensive data set which compares the performance of over 2,100 US mutual funds from 2000 to 2017.
The research finds clear evidence to suggest that a manager who produces a low information ratio is very likely to be among the worst, benchmark-adjusted performers in following years. Similarly, there is also evidence to suggest that managers with a high fund turnover or who experience high net fund inflows also tend to underperform their benchmarks in subsequent years.
Andrew Clare (pictured), Professor of Asset Management at Cass Business School, says: “Choosing the right active fund manager is clearly a challenge for all investors given the wide range of choices out there. It is equally important to know when the time is right to switch investment funds from an existing manager to a new manager. Our research suggests avoiding investing with managers that produce a low information ratio, have high turnover or where the fund experiences high net inflows.
“We hope that our research will help investors make these difficult decisions which in turn will hopefully help them achieve better investment outcomes,” says Clare.
Guendalina Bolis, Head of the research team and fund management at Inversis and Chair of the International Advisory Board for Fund Selection, says: “Active management is often criticised because many active managers fail to meet their respective benchmarks. So, it is important to understand better what makes a successful manager so I would like to thank Inversis for supporting the research together with the International Advisory Board for Fund Selection, which provided insight on the results and methodology.”
