In a new research paper, Shahin Shojai, global head of strategic research at Capco, and George Feiger, chief executive of Contango Capital Advisors, along with a third author, Rajesh Kumar, evaluate academic contributions to the field of asset management and find them wanting, at least in terms of how the real world works.
“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,” the authors write in “Economists’ Hubris–The Case of Equity Asset Management.”
They question whether any portfolio managers look for the efficiency frontier in making asset allocation decisions. Why? Because it is just about impossible to locate in reality. Instead, the authors say, managers “base their decisions on a combination of gut feelings and analyst recommendations.”
Shojai and Feiger assert that performance evaluation methodologies are unable to compare managers’ performances in a way that is useful to investors. Since portfolios cannot be meaningfully compared, they suggest that “selecting portfolios that simply perform better than their peers, irrespective of their so-called risk, might not be a bad idea.” They maintain that the use of faulty performance evaluation models has resulted in many successful managers being wrongly discounted, with possible negative consequences for their ability to attract assets.