Mutual fund managers who take a patient, long-term approach to investing tend to outperform their peers who trade frequently, a new study shows. The research, published in the Journal of Financial and Quantitative Analysis, introduces a new way of measuring a fund manager’s investment horizon and shows that fund managers with longer holding periods earn better risk-adjusted returns.
Russ Wemerers, a professor of finance at the University of Maryland, Robert Downey Street, explains: “Over the next five years, stocks held primarily by long-term funds performed better each year, adjusted for risk. Stocks held primarily by short-term funds were more than 3% higher.
A new way to measure investing patience
Warmers and his colleagues developed a unique metric called the Holding Period (HH) metric, which examines how long mutual fund managers typically hold stock positions. The research found significant differences in investment approach – funds in the shortest quintile held each position for an average of just 1.1 years, while funds in the longest quintile held stocks for an average of 4.8 years.
This change in holding period appears to have a significant impact on performance. Research shows that funds with the longest holding periods achieve positive risk-adjusted returns of 7-9% over five years, 5-12% higher than shorter-term funds.
Learn about superior performance
Research shows that patient fund managers succeed by developing deeper insights into a company’s long-term prospects. They appear to be particularly good at identifying companies with strong long-term fundamentals and cash flow generation potential.
“Our evidence suggests that these long-term funds use insights into a company’s future long-term fundamentals to predict stock prices,” the researchers wrote. The findings challenge the common belief that more active trading leads to better returns.
Impact on individual investors
The research provides valuable guidance for individuals investing in mutual funds through their retirement plans. Many people rarely adjust their investment choices once they make them—a behavior that is very consistent with choosing long-term funds.
“If investors in such plans prefer actively managed funds, then they could benefit from choosing long-term funds over short-term funds,” said Warmers, who serves as director of the Smith Center for Financial Policy.
client connection
The study also found an interesting relationship between the methods of fund managers and their investors. Long-term funds tend to attract more patient investors who are less likely to move money in and out of the fund frequently. This stability enables managers to maintain long-term investment strategies without being forced to engage in short-term trading to meet redemptions.
The research provides concrete evidence for investing icon Warren Buffett’s famous statement that his “favorite holding period is forever.” While it may not be forever, the research shows that longer holding periods (measured in years rather than months) do lead to superior investment results.
The study was conducted by researchers at the University of Maryland, University of Ottawa and the University of New Brunswick and published as a lead article in the June 2024 issue of the Journal of Financial and Quantitative Analysis.
If you found this article useful, please consider supporting our work with a small, one-time or monthly donation. Your contributions allow us to continue bringing you accurate, thought-provoking science and medical news you can trust. Independent reporting takes time, energy and resources, and your support allows us to keep exploring the stories that matter to you. Together we can ensure that important discoveries and developments reach those who need them most.
