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preet banerjee

In the investment industry’s world, it’s all about the money. That’s why they toss numbers at you instead of trying to address the fact that the title “adviser” is just a word, not a profession backed by universal standards of training, transparency, ethics and regulatory oversight with clout. Pretty much anyone can call himself an adviser.

It would be reasonable to assume that the personal investment portfolios of professional fund managers should outperform non-professional investors. But that might not be the case.

A new research paper examined the personal portfolios of 84 mutual fund managers in Sweden. Authors Andriy Bodnaruk from the University of Notre Dame and Andrei Simonov from Michigan State University couldn't find any evidence that financial experts invest better than non-experts in the same socio-economic class. The fund managers also failed to diversify their risk better and showed some of the same behavioural biases that afflict us mere mortals.


It could be difficult to get fund managers to spill the beans on their personal portfolios. But it turns out the researchers didn't have to ask. In Sweden, there is a wealth tax and in order to collect, the government requires detailed records of investment portfolios. Information on the personal portfolios of the fund managers was available right down to the individual security level. The researchers had a field day with the data.

When they compared the private investment decisions of the fund managers to non-fund managers with the same age, gender, income, education, and wealth, they found no material difference in performance. In fact, the professional money managers even underperformed the portfolios of the wealthiest 1 per cent of Swedes.

The authors state that "going long in portfolios of managers and shorting portfolios of the wealthiest 1 per cent of investors delivers negative alpha between 28 basis points and 45 basis points per month..." That's academic talk meaning wealthy, non-professional investors outperformed the professional fund managers when controlling for differences in risk between their collective portfolios.

Interestingly, if a fund manager held a stock both personally and in the fund they managed, they showed higher performance for these stocks than ones that they only held personally. The researchers suggest that the information advantage offered by the mutual fund's resources could explain this difference.

The resources, in this case, refer to better data and access to teams of analysts who help with the stock selection for the fund by the manager. Think of it this way: if two people personally handled the maintenance on their own cars, it's likely that if one of them worked in an automotive repair garage, he would have a easier go of it with access to information and tools at his disposal.

The research also suggests that managers eventually figure this out as the more experienced managers tended to increase the percentage of personal holdings also held by their funds after periods of personal portfolio under-performance.

What are the takeaways from this study?

For the highest net worth investors, the authors found no evidence that investment expertise adds value to investment decisions. That suggests that an emphasis on other aspects of financial advice, such as tax, estate, and insurance planning, is a more beneficial goal for wealthier investors.

For less well-off investors, the value of investment expertise seems to be higher, although a footnote in the study suggests that when offered professional investment advice, investors in this category are less likely to adhere to the recommendations.

How ironic.

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