Mutual fund managers are no more successful at managing their own personal portfolios than most individual investors are. Rather, the professional managers often make the same mistakes and fail to beat the indexes. The only advantage they do show is when they invest in the “best ideas” from within the funds they manage; yet such investments do not comprise the majority of fund managers’ personal portfolios.

The findings are based an analysis of mutual fund managers in Sweden. Sweden was selected for analysis because the country assembles records of financial assets in order to levy a wealth tax. As such, the Swedish government has records going down to the individual security level. By comparing these records against a database of mutual funds, researchers were able to analyze the personal portfolios of Swedish fund managers.

In general, fund managers perform no better than affluent individual investors who are not mutual fund managers (“matched peers”). The difference in the returns of the personal portfolios for both groups is statistically insignificant. Fund managers do, however, realize a performance advantage of about 0.9% per month when holding their “best ideas.” These are stocks owned by the funds they manage, but not owned by other funds offered by their employer. Conversely, mutual fund managers underperform when holding stocks held by other funds within their fund family, but not owned directly by the mutual funds they personally manage.

Notably, the relative performance of mutual fund managers worsens when compared to wealthiest 1% of individual investors. The wealthiest individual investors beat mutual fund managers by between 0.28% and 0.45% per month. The researchers attribute the difference to stock selection and not market timing.

Fund managers are also no better at diversifying their own personal portfolios. Fund managers allocate a lower fraction of their portfolio to individual stocks than the wealthiest 1%, but hold a similar number of stocks and have a similar degree of concentration as their matched peers.

Similar comparisons exist for behavioral errors. Fund managers are just as likely to hold onto losing stocks and sell winning stocks as individual investors. (This “disposition effect” is lower for mutual fund holdings held within the managers’ portfolios, however.) Fund managers also engage in similar levels of portfolio turnover as comparison groups.

Source: “Do Financial Experts Make Better Investment Decisions?” Andriy Bodnaruk and Andrei Simonov, SSRN, October 7, 2014.