Manager Education and Mutual Fund Performance

By Aron Gottesman (Pace University) and Matthew Morey (Pace University), Journal of Empirical Finance

This study examines the relationship between manager education and fund performance and finds that the mean GMAT score of the MBA program which the fund manager attended is positively correlated with future fund performance. Previous studies that have examined this issue were conducted during bull market periods which potentially bias the results. In contrast, this is the first study to examine the relationship over a period that better represents the typical stock market conditions likely to be faced by fund managers.

The authors focus on a sample of 518 equity funds that existed at the end of 1999 and had only one manager who received an undergraduate degree from a U.S. college or university. Using the Carhart model, the authors examine the future risk adjusted performance of each fund over the subsequent four years which includes years of both negative and positive stock market returns as measured by the major stock indices. Then using various statistical methods, the authors measure the relationship between the educational background of the manager and risk adjusted performance. Among the variables they examine are 1) the average GMAT score of the manager’s MBA program, 2) the average SAT score of the manager’s undergraduate institution, 3) whether the manager’s undergraduate degree is from a liberal arts college, 4) whether the manager holds a CFA designation, and 5) whether the manager has a Ph.D.

The key result of the study is that GMAT scores are linked to future fund performance. Managers who hold MBAs from schools ranked in the top 30 of the Business Week rankings of MBA programs clearly exhibit performance greater than those managers who hold MBAs from unranked programs. Although the authors do not specifically quantify the performance differential, the statistical relationship is very strong (i.e. is statistically significant at the five percent level). The other education variables generally have no relationship with future performance. To ensure the validity of the results, the authors control for other factors (fund size, expenses, and turnover ratio) that may influence fund performance. In addition, the authors find that the results hold for subperiods of the sample (i.e. 2000-2002, 2001-2003) and across various fund investing styles (i.e. aggressive growth, growth, growth and income, equity income, and small company).

Overall, the results strongly suggest that the quality of the graduate education received by a fund manager can greatly influence the performance of the fund he manages and that investors can improve the performance of their portfolios by taking such information into consideration.

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