Paper: "Fund Manager Use of Public Information: New Evidence on Managerial Skills"

I saw this paper mentioned by William Bernstein, who sadly is an efficient market theorist but is still worth reading.

For many years, I’ve been troubled by a conundrum: If mutual fund investors are not earning the market return, even adjusting for expenses, who is taking the winning side of their transactions? The yawning gap between dollar-weighted and time-weighted mutual fund data demonstrates just how far short John Q. Public falls. Amazingly, professionals, as represented by the managers of hedge funds, mutual funds, and pension funds, don’t do that much better.

So, after Bogle’s Croupier collects his take, who is getting rich off the losers? Recent articles from the finance literature, popular press and, strangely enough, cognitive psychologists shine some light on this thorny question.

The first piece, by Marcin Kacperczyk and Amit Seru in the latest Journal of Finance, is entitled "Fund Manager Use of Public Information: New Evidence of Managerial Skills." In order to probe the relationship between public information and equity returns, the authors devised a measure of how aggressively and often mutual fund managers responded to analyst recommendations. They found that the more a manager did so, the worse his results. The authors concluded that "the value of a sophisticated investor derives from the private information he brings to the process." (Italics added.)

Kacperczyk and Seru cannot possibly mean that successful fund managers are able to uncover material nonpublic raw data on a large number of companies. Rather than "private information," I suspect what they meant was "private evaluation." That is to say, successful managers demonstrate an ability to think for themselves. Whatever their precise meaning, the message is clear: those who live by the buzz die by the buzz. [...]

Three things provide long-lasting satisfaction, as quantitatively measured by academic psychologists: autonomy, meaningful contact with others, and the development and exercise of competence. Cognitive researchers loosely refer to fame, fortune, and power as "external rewards," and autonomy, connectedness, and competence as "internal rewards."

Link to the actual Kacperczyk and Amit Seru paper.