Are You Smarter Than A CFA’er?

Oguzhan C. Dincer
Illinois State University – Department of Economics; Harvard University – Edmond J. Safra Center for Ethics

Russell B. Gregory-Allen
Massey University – Department of Commerce

Hany A. Shawky
State University of New York at Albany – School of Business and Center for Institutional Investment Management

January 12, 2010


Several studies have examined whether a manager having an MBA or CFA leads to superior portfolio performance. However, these studies have yielded mixed conclusions. A possible reason is that most have considered only MBA or CFA alone, and most have not controlled for managers’ style targets. We examine MBAs and CFAs together, controlling for market conditions and style targets. We find no unambiguous difference in return attributable to MBA, CFA or Experience; but more significantly (especially in light of recent events), CFAs reduce and MBAs increase portfolio risk.

Are You Smarter Than A CFA’er? – Introduction

Researchers have long been interested in the agency aspects of the management of investment portfolios. This has led to a large number of studies that attempt to relate manager characteristics to portfolio performance. Human capital theory implies that managers with greater ability should, at least in the long run, have portfolios with better performance than “average”. A natural extension of this is that managers with better education ought to exhibit better performance. Common forms of education for portfolio managers are generally a formal MBA degree, a CFA certification, or accumulated experience from the School of Hard Knocks.

We examine whether there is a discernable impact of the type of education managers have on the performance of their portfolios. Using a unique data base (PSN) that affords us the opportunity to obtain more detailed data on managers, we find that after adjusting for risk and portfolio style targets, there is no significant difference in the return performance of these portfolios that is attributable to any of these educational levels. More importantly however, we find that managers with CFA designations have portfolios with substantially lower risk, while managers with MBA degrees have portfolios with higher levels of risk.

The research in this area has focused primarily on two issues. First, does the CFA designation add value? and second, does an MBA degree add value? The stream of studies on the value of an MBA has also had some interest in relating the “quality” of the MBA granting school to the portfolio performance of the manager. A few studies have included both the MBA and the CFA in their analysis and some have also included other manager characteristics, such as gender and age. For instance, Shukla and Singh (1994) and Switzer and Huang (2007) find that CFA’s outperform other managers, while Golec (1996) finds that MBA’s do. Chevalier and Ellison (1999) and Gottesman and Morey (2006) find that MBA’s from schools with higher average test scores perform better. On the other hand, Boyson (2002) finds that both CFA’s and MBA’s deliver negative performance.


Related Literature

A quick review of the literature reveals that it is difficult to discern a particular pattern with respect to the relative value of a given educational degree or even the marginal value that any individual degree. As noted recently in Wright (2010), one of the problems in finding consistency is variations in methods: the studies have used different measures of return, different comparison factors, and different samples and time periods. Some of the studies have looked only at the value of a CFA designation while others examined only the value of an MBA. Furthermore, from a methodological viewpoint, some studies have used only returns in excess of the US T-bill, while others have used returns in excess of a benchmark. Most of the studies however have used the CAPM or some extensions of it to estimate performance.

Shukla and Singh (1994) were the first to examine the value of a CFA designation. Using alphas from a single factor market model over the period 1988-1992, they find that portfolios with at least one CFA designated manager on the team performed better than portfolios without such a person, but that the portfolios also had higher risk. More recently, Switzer and Huang (2007) examine the impact of several manager characteristics such as an MBA, CFA, gender, age and experience, on the performance of 1004 small and mid-cap funds. They find that managers with the CFA designation deliver better performance, but that tenure, experience, and gender do not have a significant impact on performance.

Golec (1996) examines the impact of age, job tenure, and MBA on portfolio performance. With a sample of 530 mutual funds over the period 1988-1990, he estimates performance using a standard market model, but controls for style objectives. He finds evidence of better performance from younger managers with longer tenure, and from managers with MBA’s.

Chevalier and Ellison (1999) also examine the impact on performance of age, job tenure, and average SAT scores of the manager’s undergraduate school. They examine both returns in excess of a market index as well as excess returns from the Fama-French three factor model. They find that managers with MBA’s produce higher returns, but that these higher returns are entirely due to higher risk. They also find that younger managers do better, and managers from (undergraduate) schools with higher SAT’s have higher returns.



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