CFA or MBA or School of Hard Knocks?

Are a CFA designation, an MBA degree and experience critical success factors for fund managers? In their July 2010 paper entitled “Are You Smarter than a CFA’er? Manager Qualifications and Portfolio Performance”, Oguzhan Dincer, Russell Gregory-Allen and Hany Shawky examine the impact of having an MBA, a CFA and/or investment experience on investment manager performance. They control for market conditions and investing style and seek robustness of results by using five portfolio performance and two risk measures. Using fund performance data and manager characteristics for a sample of 890 managed equity and fixed income portfolios free of survivorship bias over the relatively calm period of 2005-2007, they find that:

• 40% of key portfolio managers hold a CFA designation, 28% have an MBA degree and 18% have both. 46% (35%) of funds have at least one CFA (MBA) on the management team. The average job tenure for key portfolio managers is about 12 years.
• On average over the sample period, managed funds beat the S&P 500 Index by 0.06% per month, with a monthly four-factor (market, size, book-to-market, momentum) alpha of -0.08%.
• The 890 funds in the sample employ 32 different benchmarks, with about 8% of funds changing their benchmarks during the sample period. The most commonly used benchmarks are the S&P 500 Index (21.6%), Russell 1000 Growth Index (14.5%) and the Russell 1000 Value Index (11.4%).
• Considering the full array of performance measures, along with risk and style adjustments, there are no differences in fund performance reliably attributable to CFA designation, MBA degree or experience level, either separately or in combination.
• However, there is evidence that portfolios managed by CFAs tend to have lower risk than portfolios managed by MBAs. There is some evidence that experience also relates to lower portfolio risk.

In summary, evidence from an array of tests does not support beliefs that CFA designation, MBA degree and level of experience are critical success factors for investment managers.

See also “What It Takes to Drive the Big (Hedge Fund) Rigs”.

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