PhD, DBA, and MSc by research theses (SoM)

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Browsing PhD, DBA, and MSc by research theses (SoM) by Subject "Active fund management"

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    Are fund managers skilled or lucky? Practitioners’ perspective
    (Cranfield University, 2021-06) Monin, Benjamin; Agarwal, Vineet; Poshakwale, Sunil
    The market share of the passive fund management industry has increased from 3% in 1995 to 41% in 2020 (Anadu et al., 2020). This study investigates whether fund managers are skilled, and if they are, can investors distinguish between skilled and lucky managers? The empirical research relies on the interviews of 20 fund managers. This sample covers various countries and different strategies and styles. I find that fund managers firmly believe they can beat their benchmark. They have clear rationales behind their investment decisions and believe the ability to go beyond conventional wisdom and to differentiate between short-term noise and long-term trends is the key skill. Hence, they believe they should be assessed over at least a 3-year horizon. My results contrast with the popular belief that the market has a short-term view. The fund managers also argue that the popular measure of their performance, the net alpha, is a poor proxy for measuring their skill for several reasons, the most important being that the management fee is not under their control. Further, skill can only be assessed through an intimate knowledge of their every trade, the degree of conviction, and the investment process. Hence, it is not possible to assess their skill using secondary data. I also show the investors value more than just the financial return from their investment, and fund managers try to build trust with the investors. Finally, I demonstrate that the fund managers are aware of the biases and have developed elaborate systems to reduce their impact and to handle the inherent randomness of their environment. These findings provide academics and practitioners with a framework to understand the complexities and challenges of the fund management industry, and why the performance is much more than simply net alpha. This research explores new topics which are fundamental to align investor and fund manager interest (e.g., relationship to information, portfolio management, etc.).
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