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November 06, 2013 at 09:47 AM
Financial professionals ever seeking that elusive screening tool that yields a meaningful investment edge may be interested in a new study that purports to find one that is easily identifiable: Does the manager have a Ph.D.?
The hypothesis is pretty simple, and probably a natural for the four doctorate holders who conducted the study: “…substantial effort and knowledge acquisition is necessary to complete the advanced coursework and execute unique research required to obtain a Ph.D. degree. Thus, individuals holding these degrees will have unusual characteristics relative to the baseline population,” write the four authors of “What a Difference a Ph.D. Makes: More than Three Little Letters,” each a professor at a Midwestern university.
For good measure they also look at managers who publish papers in leading academic journals as another factor evincing superior value beyond just the possession of a Ph.D.
And what they find when comparing domestic equity products within the institutional money management world — taking care to match those investment products by objective, size and other factors — is that Ph.D.s add 42.7 basis points, or nearly half a percent, to annual returns.
Ph.D. products — defined as those in which Ph.D.s perform key executive roles such as CEO, portfolio manager, strategist, director of research and others — also beat non-Ph.D. products in terms of Sharpe ratios, 4-factor alphas and other performance measures.
The researchers also confirmed that Ph.D. products outperformed net of fees. However, they found that including fees enhanced Ph.D. performance since Ph.D. products were significantly less pricey than non-Ph.D. products.
