Does manager tenure matter?
24 April 2015
Mike Turner – Assistant Research Manager for Funds and DFM
It’s generally believed that experience is a proxy for competence. If an individual has been carrying out the same task repeatedly, the more times they repeat that task the better they are at completing that task. For example a group of skiers, once given coaching on how to ski will on average get better the more experience they have on the slopes, this is at least the perceived wisdom. However does this theory translate to fund managers and how long they’ve been managing a fund?
The below graph illustrates the multi-asset universe segmented by fund manager tenure (how long a fund manager has been managing their current fund):
As we can see there is a peak around six to eight years in management which then drops off substantially.
The average fund manager tenure within the multi-asset universe is six years.
The percentage of fund managers with tenure over 10 years is 14%.
Fund managers who have managed the same fund for over 20 years represent 2% of the multi-asset universe.
The Sharpe ratio demonstrates the performance in excess of the risk free rate allowing for the volatility of the fund. The Sharpe ratio is calculated using the average performance of a fund across a time period minus the risk free rate divided by the Standard Deviation across the same time period.
A Sharpe ratio greater than one implies that a fund has delivered excess return for every unit of risk taken over the last five years.
If we consider that a long tenure is greater than 10 years then the below table illustrates the distribution of five-year risk adjusted returns for multi-asset funds where the manager tenure is greater than 10 years when compared to the distribution of risk adjusted returns for multi-asset funds where the manager tenure is between 5 and 10 years. We have used the Sharpe ratio as a measurement of risk adjusted return.
| 5yr Sharpe ratio | Managers >10yr tenure | Managers 5-10yr tenure |
|---|---|---|
| 0 | 0% | 2% |
| 0 - <0.5 | 2% | 13% |
| 0.5 - <1 | 80% | 64% |
| 1 - 1.5 | 18% | 21% |
As we can see when looking at multi-asset funds where the manager has been in place for more than 10 years, there are more funds where the five-year Sharpe ratio is higher than 0.5 when compared to multi-asset funds with a manager tenure of 5 to 10 years.
For Sharpe ratios between 1 and 1.5, we can see that there is little difference between the two universes.
In conclusion, manager tenure can have merit but it’s important to consider other factors too and not analyse tenure in isolation.