Amit Goyal, Emory University
Sunil Wahal, Arizona State University
Abstract:
We examine the selection and termination of investment management firms by 3,400 plan sponsors between 1994 and 2003. Plan sponsors hire investment managers after large positive excess returns but this return chasing behavior does not deliver positive excess returns thereafter. Investment managers are terminated for a variety of reasons, including but not limited to underperformance. Excess returns after termination are typically indistinguishable from zero but in some cases positive. In a sample of round-trip firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be no different than those delivered by newly hired managers. We uncover significant variation in pre- and post-hiring and firing returns that is related to plan sponsor characteristics.
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http://www.afajof.org/journal/forth_abstract.asp?ref=433
Related Paper:
Performance Perisistence in Institutional Investment Management
Jeffrey A. Busse, Emory University
Amit Goyal, Emory University
Sunil Wahal, Arizona State University
Abstract:
Using new, survivorship-bias free data, we examine performance persistence in 6,260 institutional portfolios managed by 1,475 investment management firms between 1991 and 2004. Unlike retail mutual funds, persistence in winner domestic equity portfolios is significant and economically large for up to one year. Loser portfolios, conversely, do not persist. International portfolios exhibit similar patterns, and fixed income portfolios persist up to three years. We find that better-performing portfolios offer performance-based fees and most-favored-nation clauses more often, but also charge higher fees. The magnitude of fees is insufficient to eliminate excess returns. Top performers draw an influx of assets from plan sponsors, and in the year following such inflows, alphas sharply decline.
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