Professional investors who grew up poor are more talented, but less likely to get promoted
The spawn of rich families may not — surprise, surprise — be that great at managing money, according to a new working paper published by the National Bureau of Economic Research.
Using data from investment research company Morningstar, study authors Oleg Chuprinin and Denis Sosyura analyzed the performance of hundreds of individual managers of active U.S. mutual funds that held at least $10 million in assets at some point between 1975 and 2012. Funds managed by teams were excluded.
The researchers found that "managers from poor families deliver higher alphas than managers from rich families," meaning investors from modest beginnings were actually more likely to beat broad benchmarks — and make money for their clients.
A lot more money, in fact. Fund managers who were born in the top fifth of household incomes underperformed those in the bottom fifth by more than 2% annually.
While 2% might seem like a small number, that adds up to a lot of moolah over time: Let's say, for example, you have $10,000 invested in a retirement account. In just one year, 2% of that is $200 lost. Once you're older and your balance is more like $500,000, 2% is a whopping $10,000. And that doesn't even account for interest.
There's a fairly intuitive reason for the NBER paper's findings. "Because individuals from less privileged backgrounds have much higher barriers to entry into prestigious positions, only the most skilled types can exceed these thresholds," the study's authors wrote.
Not only must managers of less wealthy origins work harder to get jobs, they aren't done leaping hurdles once they're hired: Their peers who were born rich were more also likely to get promoted, the authors found.
To come to their conclusions, Chuprinin and Sosyura compiled personal histories of money managers by reading through census records and employment and education histories, as well as records available on Ancestry.com.
Once they'd accounted for duplicates, errors, people born overseas and those in the military, the authors were left with a group 267 U.S. managers and their family histories.
The researchers believe that these findings could have implications far beyond finance, and that "social status at birth may serve as an important signal of quality in other industries," as well.