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[1]
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.