US fund managers born into wealthy families underperform their underprivileged counterparts by as much as 1.2 per cent and are also more likely to hug the benchmark, analysis of census data and fund performance shows.
They are also more likely to be promoted for factors unrelated to the performance of the funds they manage.
The research, Family Descent as a Signal of Managerial Quality: Evidence from Mutual Funds, was produced by Oleg Chuprinin and Denis Sosyura, from the University of New South Wales and University of Michigan respectively, and identified hundreds of fund managers whose parents’ census records were in the public domain.
The analysis covered the period between 1975 and 2012 and was focussed on US equities using Morningstar data. Most of the fund managers analysed were born in the 1940s.
“Our main finding is that fund managers from wealthy families deliver significantly weaker performance than managers from less wealthy families,” the authors state. Managers from families in the top quintile of wealth underperform those in the bottom quintile by up to 1.2 per cent a year on a risk-adjusted basis.
Most fund managers come from privileged backgrounds, the research notes, with the median income of managers’ fathers is at the 87th percentile.
The authors suggest the results are likely due to the high barriers of entry for people from underprivileged backgrounds to fund management, which means only the most skilled succeed.
Additionally, managers from underprivileged socio-economic backgrounds are more active, being more likely to trade frequently, have shorter holding horizons and to be less prone to herding.
The authors state: “An inter quartile-range reduction in family wealth increases the fund’s annual turnover by 4.5 per cent relative to the average unconditional turnover in the sample.”
Fund managers from wealthy families also suffer worse performance when a parent dies, the research found. This continues one-year after the death, which the paper says provides a enough time for “distractions and grievance”.
The authors suggest some might speculate that this could be due to inheritance, which diminishes the impact of financial incentives from the fund manager’s work. However, the performance gap between wealthy and underprivileged fund managers does not diminish over time as managers born poor accumulate wealth, suggesting monetary reward is not the only factor contributing to the differences in performance.