Do funds that have Ph.D. holders in key positions outperform those that do not? In their October 2013 paper entitled “What a Difference a Ph.D. Makes: More than Three Little Letters”, Ranadeb Chaudhuri, Zoran Ivkovich, Joshua Pollet and Charles Trzcinka investigate whether institutional money management firms that rely on key personnel holding Ph.D. degrees outperform those that do not. They also test publication of articles in leading economics and finance journals as a discriminator among Ph.D. holders. They focus on U.S. equity funds, which comprise over half of assets under institutional money management. They first match funds with and without Ph.D. holders in key positions by investment objective (12 styles), assets under management and past performance. They then examine the Ph.D./non-Ph.D. performance differential based on several performance measures. Using information self-reported by institutional money management firms for U.S. equity funds (performance, fee and key personnel biographies), and separate article searches in leading publications, during June 1993 through December 2007, they find that:
- About 16% of institutional money management firms controlling 54% of category assets include Ph.D. holders as key personnel. About 32% of specific funds list key personnel holding a Ph.D.
- On average over the next year, funds involving key personnel with a Ph.D. (Ph.D funds) slightly outperform similar non-Ph.D. funds based on:
- Gross return (by 0.43%).
- Gross monthly Sharpe ratio (by 0.008).
- Gross monthly four-factor (market, size, book-to-market, momentum) alpha (by 0.03%).
- Fees for Ph.D. funds holders are lower than those for similar non-Ph.D. funds by an average 0.04% per year.
- Restricting the sample of Ph.D. funds to those of firms founded by Ph.D. holders produces comparable results.
- Restricting the sample of Ph.D. funds to those involving Ph.D. holders who have published at least one article in a leading economics or finance journal increases average next-year gross return outperformance to 1.1%.
In summary, evidence suggests that a relevant Ph.D. credential (especially one corroborated by articles published in leading economics and finance journals) among key personnel may represent a slight edge for an investment fund.
Cautions regarding findings include:
- The sample period is not long for assessing annual performance differences.
- Given the potential uncertainties in unevenly self-reported data and the judgment involved in matching fund styles, the reported performance differences do not seem compelling.
