Morningstar Magazine - October/November 2016 - 62

Strategies the manager of a newly launched fund is buying stocks in a manner similar to the typical manager who is a CFA charterholder. In general, we attempted to capture various perspectives of a new fund by focusing on data categories such as fund structure, manager demographics, firm reputation, competition within category, portfolio disclosure, portfolio style, and economic regimes. For the purposes of this paper, we define newly launched funds as any fund with less than 12 months of track record. We do not consider a newly offered share class to be a new fund. Equity Fixed Income p Allocation % p We are onlypinterested in brand-new funds. We include open-end funds and exchange-traded10 funds in our sample. All explanatory data that we use would have been available within that first8 year. The variables we are trying to explain are forward 36-month risk-adjusted returns and 6 forward 36-month cumulative fund flows. The study is global and begins in January 2005. The last new funds to be included in our study 4 were launched by March 2013. 2 EXHIBIT 2 Credentials Managers of new 0 Flows Model Count Star Rating Model funds who attained a CFA designation posted slightly better returns and attracted more money, especially fixed-income skippers. p Equity p Fixed Income p Allocation % 12 9 6 3 Flows Model 62 Star Rating Model Morningstar October/November 2016 0 Findings on New Funds Managers who own their funds have historically performed better and garnered more assets. Fund management ownership is an excellent signal for investors. Data from our study indicates that portfolio managers who have their financial interests aligned with investors run higher-quality funds. Investor preference for such ownership outpaces the benefit of higher risk-adjusted returns. A typical equity fund will have on average 5.5% higher risk-adjusted returns and will move up 6.5% percentiles for flows within its category. For fixed income and allocation, the benefit is more dramatic, 1.9% and 4.0% increases in risk-adjusted returns, with a 6.9% and 8.9% percentile flows increase, respectively. We did not differentiate between the levels of manager ownership, only noting whether or not a single manager had at least $1 in the fund. We noticed a significant number of funds report no manager investment in their funds. By doing so, the fund is effectively sending a signal that the management team's financial interests are not aligned with their end investors' and they are not willing to do so, even at a minimal cost. Not doing so suggests that the funds may be losing out on future business. CFA Difference: Charterholders achieve better outcomes and are preferred by investors. Investor preferences for CFA-designated portfolio managers follows similarly to their preferences for manager ownership. While the average increase in fund returns across asset classes ranges from 1.1% to 1.5%, the expected average flows varies among fund type. Fixed-income investors display the strongest preference for managers who are CFA charterholders as the average benefit is a 9.8% increase in category flow percentiles. Equity and allocation funds on average receive a 4.7% and 2.5% percentile increase, respectively. Investors have imperfect knowledge about a manager's capabilities, so they are likely using the CFA charter as a proxy for skill and education. Our study shows the signal is a beneficial metric to investors from the perspective of improving their long-term performance, too. Interestingly, the preference varies dramatically across asset classes. This tells us the importance of a more educated manager differs for investors depending on the investment type. Yet, the effects in terms of outperformance are very similar, regardless of asset class. Regardless of the magnitude, having a fund managed by a CFA charterholder has resulted in higher flows and higher star ratings. The interests of the asset manager correspond to the investor. Shifting Gender Preferences: Female portfolio managers tend to garner more assets. The inherent trait of a manager's gender affects flows into a fund. To determine an investor's perception of a portfolio manager's gender, we calculated the probability of being female, given a first name and birth year. For a team-managed fund, we used the highest probability of all the fund's managers. Instead of using a binary indicator variable, the continuous probabilities can tell us about an investor's perception of gender. If investors can automatically assume a portfolio is managed by a woman, do they prefer that fund more than a fund with less clear information regarding the manager's name? In doing so, we can test whether there is an overall investor bias for female portfolio managers. Our study suggests gender does matter to investors. Flows follow female portfolio managers for equity and fixed-income asset classes. Our hypothesis for why there is this preference for female management corroborates previous Morningstar studies with our data. Last year, the "Fund Managers by Gender" report determined that women are underrepresented in the fund management industry relative to other professions (Lutton, Davis). Therefore, we assume women face significant headwinds in advancing their careers in the financial industry. So, the average woman who does advance to become a portfolio manager should be higher-performing than the average male portfolio manager. Our reasoning implies a female portfolio manager signals to an investor higher management skill, which is represented by a positive association between flows and gender. As the demographics of who is in control of private wealth change to become more split between men and women, we expect to see preference for female portfolio managers to be positive and grow over time (Lutton, Davis).

Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2016