This article appears in the May 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Beware the fund manager who thinks it’s all about them. New research finds that fund managers with narcissistic personalities underperform their more levelheaded competition by taking greater risks and failing to adhere to their promised investment strategies.
At the annual conference of the Swiss Society for Financial Market Research in April, researchers from the Philipps University of Marburg in Germany presented research that sought to identify fund managers with narcissistic personality traits and compare their performance with humbler managers.
The research found that narcissistic managers are much more likely to deviate from their fund’s advertised investment strategy and that their risk-adjusted fund performance was lower by an average of about 1% annually.
The “major manifestations” of narcissism include “an exaggerated sense of self-importance and entitlement, a lack of empathy and a constant need for attention and admiration,” the paper stated.
The authors argued that these traits can lead fund managers to overrate their own abilities, take bigger bets and pursue novel, unproven investment strategies. Narcissistic fund managers “tend to be attracted by bold and rather risky investments, which result in a higher volatility of returns,” they wrote.
This works to the detriment of investors, undermining asset allocation and risk preferences.
Perhaps more importantly, narcissistic fund managers are more likely to overestimate the payoff of taking bigger portfolio risks.
While the research found that raw returns for narcissist and non-narcissist fund managers were similar, the narcissists were taking more risk to get the same level of investment performance — hence the lower risk-adjusted returns.
“Specifically, narcissistic fund managers are inclined to gamble on extreme outcomes and thereby tilt their asset allocation toward riskier stocks without compensating their shareholders by means of higher average risk-adjusted returns,” the paper stated.
In particular, the research found that narcissistic managers had a higher proportion of both small-cap stocks and growth stocks in their portfolios.
The authors noted that their conclusions match findings of prior research about highly narcissistic CEOs. Companies run by more narcissistic executives tend to experience more volatile corporate performance, due in part to CEOs’ appetite for large, risky acquisitions that feed the executives’ self-image but often don’t pay off for their corporations.
To examine the phenomenon in fund management, the researchers mined the transcripts of fund manager interviews published on The Wall Street Transcript database. Using a standard metric for assessing narcissism known as the Narcissistic Personality Inventor y, the researchers scored managers who overwhelmingly spoke in the first person (I, me, my) as a proxy for a high degree of narcissism.
The researchers found the fund managers they reviewed were significantly more narcissistic than the CEOs examined in previous research:“The average level of narcissism among mutual fund managers is almost twice as high as the narcissism scores obtained for CEOs in prior research.”
The measures of fund managers’ narcissism were then compared with their funds’ performance, revealing the downsides for investors.
The researchers also tested their findings against another measure of narcissism — social media presence. To that end, they trawled the LinkedIn profiles of fund managers and counted the number of lines in their personal profiles. Prior research on CEOs also used LinkedIn profiles as a proxy for narcissism, on the basis that social media platforms facilitate narcissists’ need for attention and admiration by touting their professional achievements.
“This arguably reinforces the narcissist’s positive self-views and is an expression of entitlement, as a narcissist believes to be deserving of publicity,” the paper noted.
While fund managers found to be narcissistic through the transcript analysis were 34% more likely to run their funds differently than their prospectuses officially indicated, fund managers with more extensive LinkedIn profiles were 77% more likely to deviate.
The risk-adjusted performance of fund managers with longer LinkedIn profiles also was worse:their returns trailed those of more humble managers by about 33 basis points annually.
The researchers also found that teams can offset the negative effects of highly egotistical managers. The research focused on funds managed by lone managers in order to isolate the effects of narcissism, but the researchers found that funds managed by teams that also included narcissistic managers did a much better job of adhering to their planned investment style. Team-run funds weren’t nearly as likely to drift off script into riskier assets or unproven strategies.
“Our key results highlight the importance of teamwork in money management,” the researchers stated. Specifically, they found that “the negative impact of narcissism on style conformity is significantly mitigated in team-managed funds.”
The findings suggest that fund managers should promote teamwork to diversify opinion, the paper stated.
However, the benefits of teams in terms of tempering the effects of individual narcissism didn’t extend to fund performance, the researchers found. Even in teams, narcissists undermine risk-adjusted returns.
Given that finding, the researchers suggested that fund companies should make the effort to screen out narcissists in the first place to shield both their funds and their investors from the negative effects of narcissism on performance.