Fund Spy

Think Twice Before You Ditch That Laggard Fund in Your Portfolio

Jeffrey Ptak, CFA

Executive Summary

  • An influential 2008 study found that institutions lacked skill in hiring and firing investment managers. In subsequent periods, hired managers underperformed fired managers.
  • This piece examines whether mutual fund investors are skilled in hiring and firing managers, with funds’ organic growth rates serving as a proxy for hiring and firing.
  • Our study of active U.S. stock funds found that fund investors had a propensity to “hire” funds that outperformed in recent three-year periods and “fire” those that underperformed.
  • However, as with institutional managers, the “fired” funds went on to outperform the “hired” funds in subsequent years. After taking fund mortality into account, “hired” funds were only slightly more likely to succeed than “fired” funds after the hiring/firing decision.
  • The findings are yet another reminder that past performance alone doesn’t suffice when deciding which funds to buy and sell. 

Institutional Investors: Hiring Versus Firing
Are investors skilled in hiring and firing investment managers? The literature suggests not. For instance, an influential 2008 study of approximately 3,700 large institutions found that these well-resourced and informed investors tended to hire managers that had outperformed their benchmarks in recent years and fire those that underperformed. Yet, the study found that the hired managers underperformed in the years following hiring, on average, while the fired managers outperformed after getting canned.