The time of year a mutual fund manager was born can make up to half a percentage point difference in annual fund performance, according to
Kevin Mullally, a business professor at the University of Central Florida who led the research, said that while the "relative age effect" is a well-established phenomenon in sports and academics, he was interested to see if it carried over to the world of finance.
The effect was
To enter an age-class hockey league, a player needed to turn 10 years old by Jan. 1, the league cutoff date. This means that a player who turns 10 on Jan. 2 will be roughly a year older than a player who turns 10 on Jan. 1, but they will play in the same league.
For young players, the physical development and skills gap between a relatively younger player and a relatively older player can be significant, enough so that the older players can more easily move into more competitive leagues with better coaching and training, giving them even more advantage over younger peers.
The same effect is found in education, where students born immediately after the school cutoff date — typically Sept. 1 in the United States — are roughly 20% older than their classmates with August birthdays.
So, how does this relate to mutual fund managers, some of whom have always been relatively older than their same-aged peers and thus perhaps gained more confidence than those who have been younger than their same-aged classmates?
"Our theory on it is that this is a proxy for confidence," Mullally said. "Because I've had a better experience in grade school, in elementary school, middle school, whatever the case may be, because I'm outperforming my peers at that age, our theory is that basically that that just persists into adulthood — you are more confident because of that experience."
Analyzing data on over 4,000 mutual fund managers, the research team found that relatively older managers demonstrate greater confidence levels in a few key ways, including making larger portfolio bets and "
Relatively older managers also "receive greater fund flows, even after conditioning on their (higher) level of returns, consistent with them being better at marketing the fund to investors," according to the researchers.
This confidence gap is evident even to unwitting observers. As part of their research, Mullally and his team collected pictures of 119 relatively older managers and 136 relatively younger managers from their LinkedIn profiles.
After creating 2,000 pairings of one randomly chosen relatively older manager and one relatively younger manager, the team asked survey respondents which of the two looked more confident.
Respondents chose the relatively older manager 55% of the time.
"If this is just random, right, it would be roughly 50/50 in either direction," Mullally said. "We were actually completely shocked by this."
Although an appropriate level of confidence may improve market performance, other research has also documented the disadvantages of overconfidence.
Investors who demonstrate an overconfidence bias are more willing to make riskier bets in the market, according to the findings from a
Despite his team's findings, Mullally said that this confidence gap is unlikely to be a "tradable strategy."
"While the performance differences are evident in large panel datasets, identifying a return difference for a single fund manager in a noisy series of returns is considerably more difficult," the researchers said.
When it comes to assessing the quality of a mutual fund for his clients, Randy Bruns, founder of Model Wealth in Naperville, Illinois, said he likes to "keep it simple."
"Costs are without question the most critical factor in our mutual fund selection process," Bruns said. "Avoiding funds with high expense ratios and high turnover ratios has historically been a winning strategy."
After that, advisors should avoid chasing "star managers," according to Bruns.
Ashley Folkes, a financial advisor at American Heritage Financial in Hoover, Alabama, tends to agree."Be careful not to chase their stars," Folkes said. "Look for funds with team tenure, experience, a philosophy that you are behind, expertise in the asset class they manage, a team that sticks to their philosophy over the long term and a track record of outperforming their respective benchmark."
