If you’re looking for improved fund performance, search out managers who attended elite colleges with high entrance requirements, suggests research by University of Chicago professor Judith Chevalier and Massachusetts Institute of Technology professor Glenn Ellison.

Four key characteristics that have significant effects on a fund’s predicted return include the fund manager’s age, average SAT scores at his or her undergraduate university, whether he or she has an MBA and how long he or she has held his or her current position.

For example, a fund manager who graduated from a top school could be expected to produce better returns each year than a manager from an average school. Having an MBA should also help give a manager’s returns an additional boost. The advantage apparently enjoyed by MBA holders, however, is largely explained by their willingness to hold so-called riskier “glamour stocks” — those with high market/book value ratios.

As well, the researchers note, this result could also reflect a tendency of managers with high SAT scores to work for funds that have better support staff or superior compensation packages that might induce greater work efforts.

Notwithstanding these concerns, this “MBA effect” does seem to have weight. In a more recent paper, Pace University professors Aron Gottesman and Matthew Morey studied a sample of 518 equity funds from 1999 to 2004. The funds all had only one manager who had received a degree from a U.S. college or university.

They found that managers who hold MBAs from schools in the top 30 of the Business Week rankings of MBA programs do indeed produce superior returns when compared both with managers without MBA degrees and with those holding MBAs from unranked programs. Although the Pace study’s authors don’t specifically quantify the performance differential, they say the statistical relationship is very strong.

Other educational variables such as whether the manager has attained a CFA designation or holds a non-MBA graduate degree seem to have little impact on fund performance, they report.

In a similar vein, University of Michigan professor Haitao Li and Xiaoyan Zhang, a professor at Cornell, looked at slightly more than 1,000 hedge funds from 1994 to 2003, studying the relationship between their returns and the academic standing of their managers’ alma maters.

The researchers found a link between a hedge fund’s performance and the average SAT score at its manager’s school. More important, this higher return was produced without a significant increase in volatility. The average hedge fund managed by someone who went to a “better” school incurred significantly less risk than one whose lead manager attended an institution with lower average SAT scores.

Compensation may be an issue here. Mutual fund managers are typically paid based on assets under management, which gives them an incentive to let their funds grow beyond a size that they can manage profitably. In some instances, this AUM growth can mute the better performance that might otherwise be associated with having attended a school with higher test scores. Hedge fund managers, however, typically earn much more from sharing in their funds’ profits than from simple AUM growth. As a result, they have a strong incentive not to let their funds grow too big, making the test-score effect more pronounced, the researchers believe.

Tracking where managers went to school can pay off in other ways as well, suggests a recent study by Lauren Cohen of the Yale School of Management, Andrea Frazzini of the University of Chicago and Christopher Malloy of the London Business School. Managers tend to overweight the stock holdings of firms that are run by individuals in their education network and earn higher returns on these “connected” holdings than on non-connected holdings, their research suggests.

They determined this by analysing the biographical information of fund managers and senior company officers, and tracking fund managers’ trading decisions in relation to firms that had senior officers that were part of the managers’ education network, as well as firms that were outside of it.

The overweighting and returns were not driven by industry, company or fund characteristics, the researchers discovered. Instead, returns were concentrated around corporate news announcements. Portfolio managers earned significantly higher returns on connected holdings in the months when news was released from firms in their network, the researchers report, while there was no difference in returns of non-connected stocks in months of news or no news. IE

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