Economists’ hubris — the case of equity asset management

Shahin Shojai, George Feiger () and Rajesh Kumar ()
Additional contact information
George Feiger: Contango Capital Advisors, Postal: 111 Sutter Street, Suite 975, San Francisco, CA 94104, http://www.contangoadvisors.com/
Rajesh Kumar: Institute of Managment Technology, Postal: UG-02, Dubai International Academic City, P.O. Box: 345006 | Dubai | United Arab Emirates, http://www.imtdubai.ac.ae/index.aspx

Journal of Financial Transformation, 2010, vol. 29, 9-16

Abstract: In this, the fourth article in the economists’ hubris paper series, we look at the contributions of academic thought to the field of asset management. We find that while the theoretical aspects of the modern portfolio theory are valuable, they offer little insight into how the asset management industry actually operates, how its executives are compensated, and how their performances are measured. We find that very few, if any, portfolio managers look for the efficiency frontier in their asset allocation processes, mainly because it is almost impossible to locate in reality. They seem to base their decisions on a combination of gut feelings and analyst recommendations. We also find that the performance evaluation methodologies used are simply unable to provide investors with the necessary tools to compare portfolio managers’ performances in any meaningful way. We suggest a novel way of evaluating manager performance which compares a manager against himself, as suggested by Lord Myners. Using the concept of inertia, an asset manager’s end of period performance is compared to the performance of their portfolio assuming their initial portfolio had been held, with-out transactions, during this period. We believe that this will provide clients with a more reliable performance comparison tool and might prevent unnecessary trading of portfolios. Finally, given that the performance evaluation models simply fail in practice, we suggest that accusing investors who look for raw returns when deciding who to invest their assets with is simply unfair.

Keywords: Asset management; Fund management; Modern Portfolio Theory; Performance evaluation models; Efficient Market Hypothesis (search for similar items in EconPapers)
JEL-codes: G11 G14 G23 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1421

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