It is -35 degrees outside and I heard last night on the local news that on January 23, 2013, Ottawa was the coldest capital in the world. It was colder in Ottawa than Siberia or Nunavut. Now this type of weather condition has a variety of impact on my fellow humans. Some brave the cold weather and go skating on the Rideau Canal, some are out for drinks, while others have barricaded themselves in their shelter and questioning the moment they decided to move to Ottawa. I on the other hand decided to do some research into the funds management business in Canada.
The funds industry – mutual funds, hedge funds, ETFs - has been on my mind for quite some time. My previous look into the industry along with the barrage of articles that come my way have all but painted a dismal track record for funds performance in Canada. The funds management industry is huge. According to IFIC, an industry trade association, the mutual funds industry manages a whopping $812 billion dollars in assets. The hedge fund industry has some $30+ billion in AUM. The money managers of this close to $1 trillion empire are most often individuals with CFA charter holders, MBAs from top-tier schools or a combination of both.
Track record of CFAs in money management
I must admit that when I first embarked on this research piece, I started off with a bias of my own. I was starting with the assumption that given the “mile deep and a foot long” focus on finance within a CFA curriculum, the CFA charter holders should be equipped with tools and understanding of the market sufficient enough to put them in the top money managers category. Six years ago, if you had asked me this question, my answer would’ve been quite different. Fresh out of school with a solid understanding of finance, I was a strong proponent of the random walk hypothesis, which simply put, is a belief that it is impossible to predict movements in the stock market. In even simpler terms; a monkey can do the job of a money manager. Somewhere down the road I wavered in my thinking. After seeing a number of my classmates from undergrad and graduate school pursue MBAs and CFAs for a career in investment management, I started to think that there must be something in these biblical texts that I didn’t learn in my years of schooling.
As it turns out, it is true that majority of the top money managers in Canada hold a CFA charter. The chart above shows the highest level of education for money managers that have a very strong track record. The money managers identified in the figure are those that manage funds which experienced anywhere between 8% to 15% return over a 5 year period. Majority (77%) of these money managers have a CFA. 15% have an MBA, 13% had a combination of an MBA and a CFA and only 8% had “other” qualifications such as a BA, B.Eng, B.Comm, BA economics, etc.
Don’t congratulate yourself too much... your choices are half chance
It’s almost midnight on a weeknight and it just doesn’t feel like the night to question my long held belief that a few of us can understand the markets better than others. I decide to march on and look at the other end of the spectrum. The money managers at this end of the spectrum have had a few tough years. They would easily be classified as the worst money managers in Canada, losing somewhere between a one-third to 11% of their clients money. Similar to my analysis above, I looked at the Fund Data Canada’s database to see the names of the portfolio managers that have managed these poorly performing funds and developed a list of portfolio manager along with their qualifications. To my surprise, amongst the worst performing funds in Canada majority of the portfolio managers (68%) hold a CFA. In other words, regardless of whether you are a money manager at one of the top performing funds or at the poorest performing funds, there is almost an equal probability that you have a CFA.
Professional money managers: sobering second thought
At the end of last year, Goldman Sachs came out with some sobering statistics on professional money managers. It found that at the end of 2012, close to 90% of hedge funds in the US were trailing the S&P 500. In other words, if you had invested your money in the market last year you were better off having purchased SPY (an S&P 500 ETF) rather than other funds managed by professional money managers.
The close to 100,000 CFA charter holders globally and over 12,000 Canadian CFA charter holders in Canada can take solace that not all is bad is news. One important observation that emerged through my research in to the investment management industry is that there is a group of people that have a tendency to do worst than average. As shown in the chart above, amongst the worst performers in the funds management industry 26% are those that do not hold a CFA or an MBA. Compare this to the top performers and for the most part you will find folks with either an MBA, CFA or both. A deeper look at the worst performers – in particular the 26% that hold other qualification besides CFA or an MBA - reveals that the majority of these portfolio managers had reneged on the basic principle of investment; diversification. Majority of these portfolio managers were over invested in a particular sector or geography. For instance the holding of these portfolio managers were mostly concentrated in oil & gas and emerging markets.
At the end of the day when it comes to investment management it isn’t really important what degree you hold. You can have a long trail of titles next to your name but a BA, MA, CFA, CAIA, CGA, an MBA or a combination thereof will do you little good if you don’t take to heart the importance of diversification.