Experience by itself does not predict whether or not a mutual fund manager will outperform in the future. Though mutual fund managers who have been the sole manager of their funds have as a group outperformed the benchmarks, a closer look finds both wide disparities in relative returns and the influence of other factors.

A professor at the University of London analyzed 357 U.S. equity funds run solely by one manager with a minimum of 10 years’ tenure as of December 2014. The study encompassed the period of 2005 through 2014. In aggregate, these managers beat their benchmarks by an average of four basis points (0.04%) per month. This equates to a relative return advantage of nearly 50 basis points (0.5%) per year on a net-of-fee basis. The results reflect a survivor bias, meaning managers who were fired or funds that were closed or merged at some point during the 10-year period were excluded from the analysis.

Just 60% of the managers included in the analysis actually outperformed their benchmarks. The average returns relative to the underlying benchmark for all funds were negative for six of the 10 years studied. Four of the six disappointing years occurred during the last four years of the period analyzed.

There was also an “absence of positive performance persistence.” Funds ranking in the bottom 10% of returns in one calendar year tended to have positive relative returns the following year. This pattern was found to occur in seven of the nine years studied. Furthermore, no consistent pattern of relative out- or underperformance was found to exist in the year-by-year returns.

There were a few traits found to be associated with higher relative returns. Funds holding more concentrated portfolios (meaning fewer stocks) and charging lower fees tended to perform better than funds with larger portfolios and higher fees. Larger funds in smaller fund families had higher relative returns than smaller funds in larger fund families. A value bias subtracted from outperformance, while a small-cap bias increased relative performance. (These last two factors may be due to the period studied, particularly to the extent that value strategies were out-of-favor relative to growth strategies.)

“The Performance of Long-Serving Fund Managers,” Andrew Clare; International Review of Financial Analysis, July 8, 2017.