Narcissism is a dangerous trait in a fund manager
As most readers of this blog will know only too well, only a tiny proportion of active fund managers succeed in beating the market on a cost- and risk-adjusted basis in the long run. Because performance is extremely inconsistent, and luck almost indistinguishable from skill, it’s exceedingly difficult to identify a genuine star performer in advance.
But let’s say you’re feeling lucky and want to give it a try. What sort of personal attributes would you be looking for in a fund manager?
First and foremost, I would suggest, you want someone with strong personal convictions. Many fund managers don’t like straying too far from the index, and these should definitely be avoided. Once you factor in the fees they charge, their chances of outperforming are particularly slim.
The flip side of high conviction
The problem is, however, that there’s a flip side to high conviction. Managers who have it are also prone to narcissistic tendencies such as overconfidence, high-risk bets and attention seeking — all of which can be very damaging to performance.
Indeed a new study shows a direct link between narcissism in a fund manager and poor returns. (1) The research was conducted by three behavioural scientists at the University of Marburg — Dominik Scheld, Oscar Anselm Stolper and Anna-Lena Bauer.
The researchers looked at the performance of more than 400 funds based in the US compared to their benchmarks over a six-year period from 2012 to 2018. Then they measured each manager against what psychologists call the Narcissistic Personality Inventory or NPI.
First they calculated how often the manager used first person singular words — “I,” “me” and so on — compared with how often they used first person plurals, such as “we” and “us.” Apparently, research has shown that use of the first person singular is a pretty reliable proxy for narcissism.
Next they looked at the length of each manager’s biography on LinkedIn. The longer the bio, apparently, the more narcissistic the manager is likely to be, with seven lines about the average. (I must say, I’m slightly more sceptical about that particular metric, not least because it puts me near the very top of the NPI scale, but bear with me.)
Narcissistic fund managers performed worst
Finally they compared each fund manager’s performance with their narcissism rating. And guess what? The most narcissistic managers tended to produce the worst returns.
“Narcissism indeed has a negative impact on a fund’s risk-adjusted performance,” the authors concluded. “The annualised underperformance of highly narcissistic fund managers amounts to as much as 1% compared with their peers with low to moderate narcissism scores.”
Scheld, Stolper and Bauer also found that style drift is more common in funds that are run by narcissistic managers. “Narcissistic fund managers,” they report, “are 34% more likely to deviate from the officially advertised investment focus” than their peers.
Interestingly, another finding of the Marburg research is that “the average level of narcissism among fund managers is almost twice as high as the narcissism scores obtained for CEOs in prior research”. CEOs, of course, tend to have larger-than-average egos, so that really is saying something.
High conviction cuts both ways
None of the above will come as any surprise to Jason Hsu, founder and CIO at Rayliant Global Advisors, and Adjunct Professor of Finance at UCLA.
“Fund managers on top of ranking tables,” Hsu recently wrote, “are generally concentrated managers with big bets. (2) However, the bottom performing managers are identical in their risk taking. If you were to interview both, you would find their investment theses compelling and well-researched. Both would have enormous conviction. Ex ante, you can’t tell who would turn out to be right.
“Only the winner gets to tell his [their] story: stories of unwavering conviction, of iron stomachs in the face of volatility, of steadfast certainty of his thesis. Few investors can resist these siren songs. But the very same characteristics that cause him [them] to be chosen — taking large risks out of hubris and then taking credit for good luck — ultimately dooms the manager as steward of wealth.”
Today’s hero, tomorrow’s zero
Remember, as well, that big winners can become big losers, and often very quickly. Neil Woodford in the UK, Hamish Douglass in Australia and Cathie Wood in the US are obvious examples.
All three of those managers, you could argue, have shown narcissistic tendencies. Was that always the case? Or did their personalities change? Did they let the success they had go to their heads? Did they start to believe their own publicity?
The answer is, we can’t be sure. But what we do know is that, thanks to low-cost index funds, there is a logical alternative to active fund management. You simply don’t need to pay premium fees to anyone — narcissists or otherwise — to make bad decisions on your behalf.
Robin Powell is a journalist, author and editor of The Evidence-Based Investor.