We often hear lot about active fund managers not being able to outperform the market. The focus comes because their funds charge investors higher fees for that lower return. The higher fees are meant to compensate the fund managers and pay for the extra research and work needed to choose which shares to buy and sell for the fund.
Clearly it’s a fool’s errand, but fund managers have to eat and some investors unknowingly continue to contribute to the active fund managers’ food drive.
What we never hear about is how those expert fund managers perform with their own money. Are they any more skilled when investing their own money than their peers?
A new study says no.
In “Do Financial Experts Make Better Investment Decisions”, authors Andriy Bodnaruk and Andrei Simonov studied the personal portfolios of 84 fund managers in Sweden, comparing them to individual investors in their peer group.
Of course no fund manager would actually volunteer this information, but in Sweden there is a wealth tax and the government maintains detailed records of investment data. Meaning the researchers went delving through data that revealed the investment performance of the fund managers.
Significantly, they found the following:
financial experts do not exhibit superior security-picking ability in their own portfolios. Private investments of fund managers perform on par with investments of investors similar to them in terms of age, sex, education level, income, and wealth.
The study also found they’re prone to the same poor habits and clouded decision making every investor faces:
We find no evidence that our financial experts make better investment decisions: they do not outperform, do not diversify their risks better, and do not exhibit lower behavioral biases.
Not that this should be a surprise because for all the criticism we give active fund managers, they are still human – and that’s the problem. They don’t know any more than anyone else, they’re prone to making the same mistakes and they can be blindsided by random events.
Until emotion free robots with embedded crystal balls start managing investment funds, we believe sticking with lower fee passively managed funds will remain the smart option.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
