Portfolio returns based on alma mater

A new study circulating through U.S. hedge funds and university campuses points to the powerful role that old-school ties play in the world of investing. Mutual fund managers invest more money in companies that are run by people with whom they went to college or graduate school than in companies where they have no such connections, the study found.

The investments involving school ties, on average, also do significantly better than other investments. Fund managers may simply know more about their old classmates, including which ones are likely to make good executives.

The alternate explanation is that those executives may be passing along inside information to the fund managers.

“Everything we have is consistent with both explanations,” said Andrea Frazzini, an assistant professor at the University of Chicago and one of the study’s three authors.

But he added, “we have no evidence of wrongdoing by any of these fund managers.”

The study looked only at mutual funds, which are required to report their holdings and performance regularly. It did not examine hedge funds, which are investment pools for wealthy individuals and institutions; hedge funds do not have to disclose their holdings publicly.

Their study, titled “The Small World of Investing,” examined 85% of the total assets under management from 1990 to 2006 and looked at different levels of university connections. In the weakest kind of connection, a fund manager and one of a company’s top three executives shared nothing more than an alma mater. They could have attended different schools within the university and have been on the campus decades apart. The most common shared school in the study, by far, was Harvard Business School.

“It’s a very good paper,” said Michael Weisbach, a finance professor at the University of Illinois. “It suggests that there is illegal activity going on, but it doesn’t provide the S.E.C. a road map. You certainly can’t prosecute someone for having a good return on a company by somebody they went to college with.”

 

(source: SmallCapMarketWatch.com)