Since active mutual funds are judged on their returns, it would seem logical for the tenure of solo managers to be tied to their performance. This appears to be the case, though tenure has more to do with not underperforming competitors than beating category benchmarks.

Two professors sought to measure the role merit plays in careers of mutual fund managers. They analyzed 2,846 funds with solo managers. These were managers who had the sole responsibility to oversee their respective funds. Managers were tracked based on both performance and the length of time they were solely responsible for running their respective funds.

The tenure for a solo fund manager is short. Nearly one out of five solo managers managed their funds one year or less. More than 50% of funds saw their managers’ run as the sole head end within three years. By year five, more than 75% of solo fund managers were replaced or began sharing duties with another manager. Just 6.85% of solo fund managers lasted at least 10 years.

Solo fund managers with tenures of at least 10 years did outperform their peers with shorter tenures. Some managers were given a grace period. Two- and three-year managers, for example, underperformed long-term managers during each year of their tenure before being replaced.

Commenting on the results, the study’s authors wrote, “Our methodology does not directly address whether performance is the result of skill or luck, but it is clear that avoiding multiple years of poor performance is an important determinant of longevity for a mutual fund manager.”

Unfortunately, manager longevity did not always lead to good returns for shareholders. Rather, even among managers with the longest tenures, nearly half trailed their category averages in a given year while at the helm. The study’s authors viewed their findings as suggesting that “in a given year, even the longest-surviving solo managers are unlikely to produce significantly more positive style-adjusted monthly returns than negative ones.”

The results imply fund manager tenure is not based on the ability to create value for the fund’s shareholders by beating the market. Rather, mutual fund managers keep their jobs by not underperforming their peers.

Source: “The Career Paths of Mutual Fund Managers: The Role of Merit,” Gary E. Porter and Jack W. Trifts, Financial Analysts Journal, July/August 2014.

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