Want to be a great fund manager? Don’t study finance

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Let’s face it, we all know there is a hierarchy of study subjects. As the eminent philosopher Dr. Sheldon Cooper of Big Bang Theory already knew, at the top of the pile are theoretical physicists and mathematicians. Below there are experimental physicists, then come engineers. Below that you have the mere mortals of economists and finance majors and at the very bottom you have…the dirt people.

That studying a non-finance major is superior should be self-evident, but if you have doubts, take a look at this study that compares the performance of finance majors and non-finance majors on their home turf: Managing money.

Based on hand-collected data of fund managers and their education (and rest assured that data is guaranteed to be free from biases) the authors find that fund managers with a non-finance major outperform fund managers with a finance major by 0.3% per quarter. That’s 1.21% per year. And if you don’t understand why the annualised difference is 1.21% and not 1.2% you must be a finance major, too.

That finance majors are unable to compete with non-finance majors can be seen from an event study where the performance of funds run by non-finance majors was compared to the performance of funds that switched from a non-finance major to a finance major. On average, fund performance dropped by 2%-4% after a finance major took over.

This performance difference is driven by the investment approach of finance-trained fund managers. Finance majors tend to focus on the Sharpe ratio as the theoretical trade-off between risk and return, while non-finance majors focus on what matters in real life: returns. The result is that finance majors tend to reduce volatility in their portfolios which increases the Sharpe ratio but also reduces returns. Furthermore, finance majors hold more diversified portfolios which is a bad move if you want to make as much money as possible.

So, there you have it. If you want to know which funds are the good ones, all you need to do is check the LinkedIn profile of the fund manager. If they have majored in finance, stay away from them, they are losers compared to us science majors. They may even be worse than those engineering majors. But not the dirt people. Nobody is worse than the dirt people…

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