Thought of the Week - A narcissist manages money
Yesterday, I wrote about narcissistic CEOs and their negative impact on company profitability and share buybacks. I also told you about a simple way to identify narcissistic CEOs. Just look at the size of their signatures. But what about the people most of us entrust with our investments: fund managers?
I am glad you ask because researchers have also looked at the performance of narcissistic fund managers. Dominik Scheld and his co-authors didn’t look at the size of the signature of fund managers but instead measured the ratio of self-referential personal pronouns (I, my, etc.) to collective pronouns (we, our, etc.) in media interviews these fund managers gave.
You probably guessed it. Narcissistic fund managers aren’t good for your portfolio. The bottom line is that they underperform their non-narcissistic colleagues by some 1% per annum on a risk-adjusted basis. They create this underperformance in two steps. First, narcissistic fund managers are about one-third more likely to stray from the investment style they claim they follow. Large-cap managers buying small-cap stocks or value managers buying growth stocks are a common phenomenon in the investment world and we can debate another time whether fund managers should be restricted to a certain style box. But the fact is that once a fund prospectus has committed the fund and its manager to a certain investment style, the fund manager has a responsibility to follow that style.
But if you are a narcissist, it is clear that the rules apply to others, not you. So why not buy some stocks outside your investment universe to create additional performance? Narcissistic fund managers are so enamoured with their own investment prowess that they think they can pick a few small and micro-cap stocks that spice up the portfolio. Similarly, they tend to pick glamour stocks that have garnered a lot of public attention so as to bask in the glory of being a holder of these stocks as well (along with the commensurate bragging rights in media interviews). Putting narcissistic fund managers into a team to run the funds doesn’t help either. While the propensity to invest outside the fund’s style declines, team-managed funds with a narcissistic member underperform practically to the same degree as single manager-led funds.
The problem with the study is that most investors cannot do a systematic analysis of the language fund managers use in media interviews. But they surely can check on the size of the fund manager’s signature in official reports. And the study by Scheld and his colleagues also provides us with another simple measure of narcissism. Just look at their LinkedIn profile and read their self-description. The longer the self-description on LinkedIn, the more narcissistic a fund manager is and the more cautious investors should be, according to this study.