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Monday, February 24, 2014

Do the Old Guys Have to Go? Really?

News summary by MFWire's editors

Let's face it. Everybody wants to get into the head of investment gurus and bottle their mojo. They will analyze and systematize every neuron-firing behind the reading of market tea leaves. Now the latest example of investment phrenology focuses on old managers and how they should hand the baton over to them youngins.

In a recent MarketWatch column Mark Hulbert cited a study arguing that investors, when choosing between two equally attractive funds, "should go with the younger one." 

Holy Geriatrics Batman, mutual funds that are only a few-years-old are more likely to beat the market than senile funds launched a decade or more ago.

The academics who came up with this conclusion aren't slouches either: finance professors, Lubos Pastor of the University of Chicago’s Booth School of Business and Robert Stambaugh and Lucian Taylor of the University of Pennsylvania’s Wharton School. The study itself passed muster enough to be published by the National Bureau of Economic Research in Cambridge, Mass.

Hulbert writes that the paper found that "when funds were less than three years old, they beat their respective benchmarks by significantly more than funds that were 10 or more years old beat theirs -- by an average of about one percentage point a year more, in fact."

Moreover, the study finds, the stuff filling the heads of geriatric fund managers is past expiration. To whit, managers who went to B-School decades ago were "taught what was the cutting edge then," but they are not "strong enough to overcome the additional competition from the new kids showing up with the latest skills."

Apparently the "old guys gotta go" philosophy in investing is itself long-in-the-tooth. For example, a behavioral study that was published in The Journal of Finance 15 years ago, made the argument that "older managers have worse performance than younger managers." 

To be sure, it's fun psychoanalyzing fund managers and debating their merits, neuroses and fashion sense. Generalizations now and then can be equally entertaining.

As to whether such cognitive histrionics can serve as the basis for investing decisions, we'll leave that question to greater minds.

However, I'll leave you with some stats on the performance of three funds so old, they should probably be placed in the investors' nursing home.

  • The Wellington Fund, one of the grandpas of the industry launched in 1929, achieved a 8.28 percent average annual performance since inception;
  • The Windsor Fund, launched in 1958, achieved a 11.50 percent annual performance since inception. 
  • Vanguard U.S. Growth, launched in 1959, achieved a 10.24 percent average annual performance since birth.

    These old guys still got game.  

    Edited by: Amy Xie


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