Asset Managers: Institutional Performance and Factor Exposures

Using data on $18 trillion of assets under management, we show that actively managed institutional accounts outperformed strategy benchmarks by 75 (31) bps on a gross (net) basis during the period 2000 to 2012. Estimates from a Sharpe model imply that asset managers' outperformance came from factor exposures. If institutions had instead implemented mean-variance efficient portfolios using index and institutional mutual funds available during the sample period, they would not have earned higher Sharpe ratios. Our results are consistent with the average asset manager having skill, managers competing for institutional capital, and institutions engaging in costly search to identify skilled managers.

Automated summary

Research shows that actively managed institutional accounts outperformed strategy benchmarks from 2000 to 2012; asset managers' outperformance came from factor exposures; implementing mean-variance efficient portfolios using index and institutional mutual funds would not have led to higher Sharpe ratios.