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Active managers performance to improve

10 December 2014

Declining fees and shift to passive to improve active fund performance, says Chicago Booth research

Active fund managers have become more skilled over time, according to new research by the University of Chicago Booth School of Business.

This increase in skill is driven in part by the fact that the new entrants in the industry are more skilled than the incumbents, perhaps due to improving financial education. Learning on the job also contributes to the steady growth in active managers’ skill. 

However, this upward trend in skill has not yet led to a corresponding rise in performance on the part of active funds, said Finance Professor Lubos Pastor during the annual Economic Outlook event at Chicago Booth’s London campus. 

The reason is that the industry has grown along with the growth of skill, and the resulting increase in competition has depressed fund returns.

"We find that active managers’ skill improves over the life of their funds, perhaps due to learning on the job. However, this positive effect on skill is more than offset by the steady growth in skilled competition. As a result, active managers’ performance actually suffers over the life of the typical fund," said Pastor. 

Going forward, Pastor expects the performance of active funds to improve. One reason is the declining trend in fees. Another is the continued shift from active to passive management. "With more and more capital migrating from active to passive funds, there will be more room for the remaining active managers to outperform," he said. 

Pastor’s research examined a sample of 3,126 US active equity funds between 1979 and 2011. His findings also reveal that fund performance deteriorates with fund age, so that younger funds generally outperform older funds.

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