Managers can be victims of their success

When selecting a global equities manager, size and established success may not be the best indicator of performance, research by consultants Russell Investments shows.

The research looked at 233 global equities managers that make up Russell’s Global Equity Universe and found that managers with less than $2 billion of assets under management and five or fewer staff on average performed best.

Russell’s global chief investment officer, Peter Gunning, said the research confirmed an established hypothesis that typically asset managers with a smaller amount of assets under management do better than ones with larger asset bases.

Global equity managers that are at the early point of what Gunning described as their “life cycle” were typically found to perform better than their bigger and more well-established competitors, Gunning said.

“When you actually look at many asset managers when they first set up shop, obviously this isn’t everyone, but in the main there is this window of opportunity where these managers typically perform very well relative to their peers,” Gunning said.

“As the firm matures, maybe it attracts more assets, maybe the principals are beginning to become a little more concerned about ongoing business risk rather than investment risk, so we often see a period where these boutique managers start to move in-line with their peers.

The research that looked at the size of funds both in terms of assets under management and staff looked at annualised returns over a five year period.

It found that funds with five or fewer staff averaged 2.58 per cent excess return relative to the Russell Global Large Cap Developed universe.

Funds of five to 10 staff achieved on average 1.77 per cent excess returns and funds with more than 30 staff achieved a -0.03 per cent average result over the same time period.

“We certainly have found that going and picking top-quartile managers that have generated top quartile performers is often a reverse indicator,” Gunning said.

“What we are looking at here is just adding some different context and perspectives in appointing investment managers.”

The fund found that funds with less than $2 billion in management achieved an on average 1.96 per cent excess return relative to Russell’s Global Large Cap Developed Universe over a five-year period.

Funds with between $2 billion and $5 billion achieved a 1.21 per cent in excess return on the same comparison. Funds between $5 billion and $15 billion achieved -0.55 per cent and funds of more than $15 billion -0.98 per cent.

Gunning said the consultants were analysed over a range of data Russell kept on asset managers and it wanted to look at different metrics than people typically examined to better identify out-performing managers.

“You virtually name it, we have looked at it from decision making structures, the size of active bets the managers are taking, (and whether) more aggressive managers typically outperform less aggressive managers,” he says.

“Even things like how old the asset management firms are, how many CFA charter holders do they have: there is a plethora of data we have access to and we are running some analysis over all of that.”

Russell also looked at where equity managers invested over a 10-year period and found that those with a regional bias generally on average underperformed those with a purely global outlook.

They found that equity managers with a purely regional focus achieved a 0.99 per cent of annualised excess return compared to 4.03 per cent for funds that had a purely global focus.