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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’
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.
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.