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Fund Managers Who ‘ Swing For The Fences ’ Often Strike Out
Such managers attract investors , but a new study shows they do not deliver superior performance . By Larry Swedroe
MUTUAL FUNDS ARE TYPICALLY CATEGORIZED by their asset classes ( whether they ’ re large growth , small value , international or emerging markets funds ) or by their quantitative strategy ( whether they look at such factors as a stock ’ s or index ’ s momentum or their constant volatility ). After analysts slice and dice funds into these categories , it ’ s easy to judge them against their peers .
But now , two authors are looking at a stylistic approach to fund management through a different lens .
In August 2024 , the two professors , John Chalmers at the University of Oregon and Arash Dayani at Clemson University , released a study called “ Mutual Fund Strategy : Swing for the Fences or Bat for Average .” Here , they examined two contrasting styles , one of which they called “ swinging for the fences ”— which describes funds holding a large number of stocks that are either “ home runs ” or “ strikeouts ,” defined as holdings with extreme relative returns . The other fund management style they call “ batting for average .” The latter category funds try to beat the market with the most holdings possible , regardless of whether these holdings all outperform . To create their sample , the authors looked at the quarterly data of actively managed U . S . equity mutual funds between 1993 and 2018 , taking the data from two universes , the CRSP Mutual Funds dataset ( maintained by the Center for Research in Security Prices ) and Morningstar Direct .
They considered a stock to be a home run if its quarterly relative performance outperformed 90 % of stocks in the quarter . Strikeouts were stocks in the bottom 10 % of performance in the quarter . The authors also compared each stock ’ s returns to that of a portfolio of stocks with similar market capitalization and book-to-market ratios . The following is a summary of their key findings :
• The styles were persistent : If you were a “ swing for the fencer ,” you stayed that way , and it was the same for batting for average .
• The swing-for-fence strategy didn ’ t have consistently good performance . A typical fund that swings for the fences does not consistently hit more home runs than strikeouts . For example , only 23 % ( less than randomly expected ) of all funds they looked at in this category with the highest returns in a quarter stayed in the same group in the next quarter and 20 % moved to the group with the lowest returns .
• Swing-for-fences funds also tend to have higher expense ratios , higher portfolio turnover and a higher
DECEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 41