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MU Business Expert Suggests Tools to Help Investors Choose Successful Fund Managers, Avoid “Copycat” Managers

Copycat mutual fund managers try to borrow from success of other managers, but often fail

Nov. 10, 2014

Story Contact(s):
Christian Basi, BasiC@missouri.edu, 573-882-4430

COLUMBIA, Mo. ­— Thousands of choices are available when investing in mutual funds; this can be especially problematic for new or small investors. Selecting the right fund manager involves researching the manager of the fund to determine if past successes are due to good decision-making skills of the manager or if the manager has copied other successful managers’ choices. In a new study, researchers from the University of Missouri Trulaske College of Business, the University of Waterloo and the University of Cambridge identified several questions that investors can ask to determine if a mutual fund’s success is due to a skilled or a copycat manager.

Pukthuanthong said that good managers do their own homework when deciding on which stocks to purchase or sell; they know how to study companies and have made good decisions as a result of their own research. On the other hand, copycat managers follow these good managers and make the same choices; however, copycats do not experience the same success because investing decisions rely heavily on specific timing. Thus, making the same decisions days or months later can have very different results.

“By law, mutual fund managers must disclose publicly every stock in their mutual funds,” said Kuntara Pukthuanthong, an associate professor of finance. “However, even with this public information about mutual funds, managers who try to copycat by choosing the same stocks for their mutual funds are not successful.”

Following the research, Pukthuanthong and her co-authors – Blake Phillips from the University of Waterloo and P. Raghavenra Rau from the University of Cambridge – recommend that investors ask the following questions when deciding on mutual fund investments:

  • Does the mutual fund have a good performance record over the last three to five years? Is its performance consistent?
  • Does the performance beat or follow the S&P 500 performance index?
  • Are many new investors purchasing shares of the mutual fund or are the mutual fund’s revenues growing?
  • Is the strategy persistent or does it change over a short period of time?
  • Does the mutual fund manager have several years of experience? How long has the manager been overseeing that particular fund?
  • How long has the mutual fund manager been employed at their firm?

Pukthuanthong and her co-authors studied funds that invested in the same stocks 75 percent of the time or more. Following identification of the mutual funds, the researchers tracked the funds’ performances and identified characteristics of good and bad managers. Copycat managers typically do not have many years of experience, have poor performance managing past funds and change strategies constantly.

“Investors should look for good financial advisors who take the time to do proper research on mutual funds,” Pukthuanthong said. “Advisors should know the managers’ history and the long-term past performance of mutual funds before recommending any type of investment.”

The study, “Detecting Superior Mutual Fund Managers: Evidence from Copycats,” was recently published in The Review of Asset Pricing Studies.

EDITOR’S NOTE: Kuntara Pukthuanthong is pronounced: KUNE – tar – rah  POOK – twoon — town

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