Own-industry knowledge does not help managers invest – study

Mutual funds, banks and insurance companies are no better at picking stocks and timing the market in their respective fields than they are in industries outside the financial sector, according to new research.

A study by Cass Business School in London has found that financial institutions overwhelmingly fail to convert their ‘home-field advantage’ – buying and selling shares in their own industries – into actual investment returns.

“The fact that we do not find robust evidence of outperformance by three major types of institutional investor in their own backyard, despite studying the world’s largest stock markets over a three decade span, is striking,” said Cass academic and co-author of the study, Dr Aneel Keswani.

The research is likely to fan the flames of the debate over the degree of skill fund managers possess. 

Whereas previous studies have looked at whether actively managed funds outperform passive benchmarks, this is the first study of its kind to shed light on the ability of investment managers to leverage their own industry insights to generate abnormal returns.

The study examined every trade over $200,000 made in the US stock market between 1980 and 2009 to discover whether mutual fund companies, banks and insurance companies outperform when selecting stocks and timing the market in their own industries versus others.

While the authors found some evidence of industry timing as a whole, they did not find that money managers were able to time their own industry significantly better. In fact, they found they were able to time unrelated industries more successfully than their own.

 The study also failed to find robust evidence of superior stock selection by money managers in their own industries.

“If financial institutions exhibit any investment skill at all, it should be particularly evident when they invest in stocks of companies that are involved in the same business as themselves,” said Keswani

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