A new paper finds support for the concept that “merit” plays some role in mutual fund manager tenure. Gary Porter and Jack Trifts analyzed Morningstar fund return data (based on each fund’s oldest share class) post-1995 on a style-adjusted basis for funds with a solo manager. The results indicate that, while managers who maintain their position for more than ten years tend to outperform managers who held positions for a shorter period of time, the longer tenured managers were almost as likely to underperform as outperform their peers the market. Porter and Trifts thus concluded that the main method in which merit factors into tenure is that managers who underperform early in their careers find their positions in jeopardy. In other words, “longevity is related to the avoidance of underperformance.”
The full paper, also covered by Forbes, can be found here.