What Is Management Tenure?
Management tenure is the length of time that an investment manager has been at the helm of an investment fund. A long-term fund performance record, preferably of five to 10 years, is thought to be a key indicator of a fund manager's investing ability and the fund's future success.
- Management tenure is the length of time that a manager or team has been leading an investment fund.
- A management tenure of five to 10 years is considered a key indicator of a fund manager's investing ability.
- For an investor, it is important to choose a fund whose management that is responsible for its success is still leading the fund.
- Management tenure is more important for actively managed funds than it is for passively managed funds.
- The longer the management tenure is the stronger the correlation is to a fund not underperforming.
Understanding Management Tenure
Investment managers are the individuals that run an investment fund, whether that be a mutual fund or a hedge fund. Management at a fund can be one person or a group of people. They are the most critical aspect of a fund as they determine its investment strategy and, therefore, its success or failure.
Investment fund investors are thought to be best served by investment managers who have proved themselves over an extended period of time. The more closely matched a manager's tenure is with a solid fund performance record, the better.
For example, let's compare two different funds: The XYZ Fund has an annualized average 10-year total return of 11% and has been run by the same manager during that period. The ABC Fund has the same 10-year annualized average total return of 11% but it has had two different managers.
A longer management tenure also means that investment managers have experienced different business cycles, providing them with valuable experience in how to invest if the market or economy goes up or down.
One's tenure covered the first nine years and the second has been on the job for only one year. Will the second manager be just as good as the first? This is an important aspect for an investor to decide before investing their capital expecting the same performance in the future.
Management tenure primarily relates to funds that are actively managed as opposed to passively managed. Actively managed funds have investment managers that actively buy, hold, and sell investments with an adherence to a specific strategy that seeks to outperform a benchmark.
A fund whose track record has shown strong performance over an extended period of time with the same investment manager is likely to attract more investors and therefore more capital as they see the fund's returns as a result of management's talent. It is often why someone investment funds, particularly hedge funds, have investment managers that are famous and world-renowned.
Does Management Tenure Mean Better Performance?
Experts are split on what management tenure indicates. A study in the 2014 issue of the Financial Analysts Journal titled “The Career Paths of Mutual Fund Managers: The Role of Merit,” by Gary Porter and Jack Trifts, explored whether longer-tenured managers delivered alpha, or outperformance, relative to the overall market.
Their study covered the period from 1996 through 2008. The data set incorporated 2,846 funds and 1,825 managers and included 195 funds with managers that had at least 10 years of experience (6.9% of the total). Their research resulted in three key findings:
- Turnover is partly related to performance. Poor performance does lead to firing.
- In any given year, even the longest-surviving solo managers are unlikely to produce significantly more positive style-adjusted monthly returns than negative ones.
- While longer-tenured managers outperformed their peers, they show no ability to deliver alpha, or outperformance, relative to their risk-adjusted benchmarks.
The authors concluded: “The key to a long career in the mutual fund industry seems to be related more to avoiding underperformance than to achieving superior performance.”
That being said, management is an important variable in the success of a fund. Better investment managers last longer in the industry as they are consistently performing well. Investment managers that are underperforming will see their careers cut short as investors will not want to do business with them based on a poor track record. The longer the management tenure, the more likely it is that the management has been successful.