Saturday, January 07, 2017

Bias Against Those From Less Wealthy Families: The Example of Mutual Fund Managers

An example of how entrenched inequality is bad for society. Republicans are set to increase inequality & entrench it more deeply, with big tax cuts for the very rich, and elimination of the inheritance tax.

Timothy Taylor
Jan. 6, 2017

When you are thinking about investing in a mutual fund , here's an impolite but seemingly relevant question to ask: How wealthy were the parents of the manager of the fund? Oleg Chuprinin and Denis Sosyura raise this question in "Family Descent as a Signal of Managerial Quality: Evidence from Mutual Funds" (August 2016, NBER Working Paper No. 22517). The paper is not freely available online, but Jay Fitzgerald offers a short accessible overview in the December 2016 NBER Digest.


"The researchers find that mutual fund managers from wealthier backgrounds delivered `significantly weaker performance than managers descending from less wealthy families.' Managers from families in the top quintile of wealth underperformed managers in the bottom quintile by over one percent per year on a risk-adjusted basis."


What's going on here? It seems unlikely that skill levels are distributed in this way across families. Instead, the plausible explanation offered by the authors is that it's a lot easier for people from high-wealth families to become fund managers, and a lot harder for people from low-wealth families to do so. Because those who start in low-wealth families face more barriers in becoming a fund manager, only the most very highly suited and skilled actually work their way into such a job. Fitzgerald notes some other differences, too:

"Indeed, in tracking career trajectories of mutual fund managers, they find that the promotions of managers from well-to-do families are less sensitive to their performance. In other words, managers who are born rich are more likely to be promoted for reasons unrelated to performance. In contrast, those born into poor families are fewer in number and are promoted only if they outperform. They also find that fund managers from less-affluent families who do make it into top ranks are more active on their job: they are more likely to trade and deviate from the market, whereas those born rich are more likely to follow benchmark indexes."


On practical grounds, there's no particular reason to believe that the underlying takeaway from the paper applies only to mutual funds. When those who face higher barriers to success manage to overcome those barriers in any occupation, it may often be a sign that their competence level is not just high, but exceptionally high.

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