Review of Quantitative Finance and Accounting, 15 (2000): 81±97
# 2000 Kluwer Academic Publishers. Manufactured in The Netherlands.
Equity Manager Selection and Performance
President, FinCast LLC.
Professor of Finance, Western Connecticut State University.
Editor, Journal of Portfolio Management.
Adjunct Professor of Finance, Yale University.
Abstract. This paper introduces a methodology to select money managers and examines their performance over
a 12 year period. We assess performance empirically by utilizing a series of well-known statistical procedures
applied to other data. The value of this study is in the uniqueness of the data and the fact that it is the ®rst study to
use the performance of a set of pension fund money managers selected on the basis of a speci®c selection criteria.
Key words: alpha, market timing, stock selectivity, Jensen's selectivity index, Treynor and Mazuy model,
Bhattacharya and P¯eiderer model, Henriksson and Merton model, Hamilton equity yardstick, meta-analysis
There have been numerous studies assessing and evaluating the performance of mutual
fund managers. The general conclusion of most of these studies over the last 30 years is
that managers exhibit some skill at security selection, but have little or no market timing
However, most of the positive performance measures have been small or
insigni®cant. Most studies have examined the performance of mutual funds because of the
availability of data. There is, however, a shortage of studies that address the investment
performance of pensions fund managers. It is important to pursue this line of investigation
because the size of the pension assets has grown to surpass $5 trillion in the 1990s with the
proportion allocated to equities estimated at about $2.6 trillion. This is about three times
the value of the dollar allocation to U.S. equity investments among mutual funds.
Furthermore, it is estimated that 20±25% of U.S. equity investments is indexed. The
amount of indexing is particularly pronounced for the 200 largest U.S. pension plans that
may have as much as 50% of equity allocation indexed. The establishment and expansion
of index funds is the result of the belief that markets are ef®cient in the long term and any
short-term inef®ciencies do not deliver suf®cient risk-adjusted returns to satisfy investors.
This belief has been supported by a series of academic studies that to date have failed to
identify consistent superior performance by active managers. Nonetheless, despite these
setbacks and trends, the largest component of equity investments among pension plans