A team of researchers from Rotterdam School of Management, Erasmus University (RSM) has won a $30,000 international prize for its comprehensive study offering a new perspective in the debate about active management of funds versus passive investing.
The winning paper Information Content when Mutual Funds Deviate from Benchmarks is published by RSM Assistant Professor Hao Jiang and Professor Marno Verbeek, and Yu Wang, a portfolio manager and researcher at the Quantitative Indicator Fund of IMC Asset Management in Amsterdam. The paper investigates fund managers with the conviction to deviate from their portfolio benchmark. It won the top prize in the Standard & Poor Dow Jones Indices’ second annual SPIVA Awards programme.
The team’s research shows that the consensus wisdom of active mutual fund managers, as reflected in their average over- and underweighting decisions relative to their benchmark indices, contains valuable information about future stock returns. Thus, in pursuit of adding long-term value, the active managers should have the conviction to take large short-term risks relative to the benchmark.
Hao Jiang explains how the award-winning paper provides new insights into the mutual fund industry and stock market efficiency. “Economists have long been puzzled by the rapid expansion of the actively managed mutual fund industry and the seemingly futile attempts of active mutual funds to outperform passive benchmarks. Applying a lens that separates active and passive portions of individual fund portfolios, we find evidence that mutual funds are actually informed investors, and that their decisions to deviate from their benchmark may have a high investment value. Nevertheless, most active funds combine their active and passive portfolios such that on average it is difficult for their clients to benefit from this added value.”
Marno Verbeek is very proud to have received this prestigious award. “It recognises the relevance of our research for the mutual fund industry. Our work confirms the existence of managerial skill, particularly for those managers who have the conviction to actively deviate from their benchmarks. At the same time, it explains why the average performance of these funds, after fees and expenses, is disappointing.”
The award-winning paper is part of a large project at RSM investigating the role of institutional investors in financial markets.
The SPIVA Awards recognise excellence in research on index-related applications, and acknowledge researchers who explore innovative techniques that enhance the use of indices in financial markets. Winners are selected by a jury of academics and industry experts.
Commenting on the relevance of the SPIVA Awards, David M. Blitzer, Managing Director & Chairman of the Index Committee at S&P Dow Jones Indices says: “The ongoing popularity, success, and growth of investing with indices depends on investments in intellectual capital and research. We support these efforts through the SPIVA Awards as well as with our own internal research. The winning paper shows that some managers who have the courage of their convictions can outperform by holding portfolios very different from their index benchmarks. The second paper uses index rebalancing to examine the impact of new financial regulations on liquidity in the fixed income markets.”
To view the complete papers, as well as the biographies of each SPIVA Awards winner, please visit: www.spindices.com/spiva.
