Article: Slow and Steady Wins the Race: The Impact of Chasing Returns on Quartile Rankings Journal: Journal of Business and Management (JBM) 2021 Vol.27 No.2 pp.1 - 32 Abstract: Purpose - The investment management industry is competitive in which managers compete for the top-quartile (1st) rank. This study shows that a manager who aims to be in the 2nd quartile (above average) instead of the 1st will end up in the 1st in the long run. Method - The study uses monthly historical returns from 01/01/1979 to 01/01/2018 and creates 4,000 bootstrap-simulated funds that invest in four different return strategies and levels of risk. After analyzing 240,000 annual returns over 60 years, it ranks these funds every year and assesses their return, assets under management (AUM), and quartile performance. Findings - Investment fund managers are torn between staying in the 1st quartile and growing AUM over a long-time horizon. This study shows that if a fund's goal is to achieve higher AUM, it should aim at the 1st quartile every year. However, if a fund's long-term goal is to stay in the 1st quartile, it should aim at the 2nd quartile every year. Limitations - In this study, the entire dataset is used for validating two hypotheses. Therefore, it would be helpful to split the full dataset into training and test datasets and conduct an out-of-sample analysis. Besides, the bootstrap method samples data for one year at a time and ignores any lagged-year effects. Implications - Investors pay a significantly higher fee to hedge fund managers, hoping that the manager has the skill to produce higher risk-adjusted returns. Therefore, investors (of public pension funds) need to know if a manager is producing excess returns due to luck or skill. Originality - Our findings are counter-intuitive since most investors do not believe that merely staying 'above average' every year can lead to 'excellent' long-term performance. Inderscience Publishers - linking academia, business and industry through research

Title: Slow and Steady Wins the Race: The Impact of Chasing Returns on Quartile Rankings

Authors: Rama K. Malladi; Jennifer Brodmann

Addresses: Author address listing can be found in the "About the Authors" section at the end of the article.

Abstract: Purpose - The investment management industry is competitive in which managers compete for the top-quartile (1st) rank. This study shows that a manager who aims to be in the 2nd quartile (above average) instead of the 1st will end up in the 1st in the long run. Method - The study uses monthly historical returns from 01/01/1979 to 01/01/2018 and creates 4,000 bootstrap-simulated funds that invest in four different return strategies and levels of risk. After analyzing 240,000 annual returns over 60 years, it ranks these funds every year and assesses their return, assets under management (AUM), and quartile performance. Findings - Investment fund managers are torn between staying in the 1st quartile and growing AUM over a long-time horizon. This study shows that if a fund's goal is to achieve higher AUM, it should aim at the 1st quartile every year. However, if a fund's long-term goal is to stay in the 1st quartile, it should aim at the 2nd quartile every year. Limitations - In this study, the entire dataset is used for validating two hypotheses. Therefore, it would be helpful to split the full dataset into training and test datasets and conduct an out-of-sample analysis. Besides, the bootstrap method samples data for one year at a time and ignores any lagged-year effects. Implications - Investors pay a significantly higher fee to hedge fund managers, hoping that the manager has the skill to produce higher risk-adjusted returns. Therefore, investors (of public pension funds) need to know if a manager is producing excess returns due to luck or skill. Originality - Our findings are counter-intuitive since most investors do not believe that merely staying 'above average' every year can lead to 'excellent' long-term performance.

Keywords: Asset management; risk; return; quartile; fund performance; benchmark; investment performance.

DOI: 10.1504/JBM.2021.141289

Journal of Business and Management, 2021 Vol.27 No.2, pp.1 - 32

Published online: 05 Sep 2024 *

Title: Slow and Steady Wins the Race: The Impact of Chasing Returns on Quartile Rankings

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