Asset managers ‘fail when investing on home turf’, says Cass

Fund managers “overwhelmingly fail” to make returns when investing the financial sector despite their intimate knowledge of the industry, according to academic research.

Cass Business School and Toulouse Business School analysis of three decades of US trade shows managers with mutual fund companies, banks and insurers fail to consistently capitalise on ’home-field advantage’, or buying and selling shares in their own industry.

The research looked at every trade over $200,000 (£152,000) in the US stock market between 1980 and 2009 to determine how performance differs between investments in the managers’ own industries and other sectors.

It suggests that managers show better timing when investing in other industries rather than their own. In addition, the study failed to find evidence of superior stock selection when managers invested in financials.

Aneel Keswani, reader in finance at Cass Business School and co-author of the report, says fund managers’ failure to secure returns on their home turf is “an indictment of some gravity”. (article continues below)

“We would expect investors with first-hand experience in the same industry as their investments to reap the rewards from being well-informed about its future profitability and the specific firms that are likely to outperform going forward – but our study suggests this is simply not the case,” he adds.

“When we look at entire financial institutions, there is no evidence of investment ability either at the individual stock or the industry level, despite the fact these institutions are investing in their own backyard.”