Picking Winners?

Professor Jose Martinez Earns Triple Recognition For Work on Dubious Investment Management

A four-year research project by UConn finance professor Jose Martinez found no evidence that recommendations by highly paid investment consultants to institutional investors subsequently outperformed the market.

Professor Jose Martinez

In his paper, “Picking Winners? Investment Consultants’ Recommendations of Fund Managers,” Martinez presents survey data from investment consultants with a combined share of 90 percent of the consulting market, and focuses on the recommendations consultants made for actively managed U.S. equity funds.

His findings will be published in the prestigious Journal of Finance. His work was also awarded by the University of Cambridge and the Commonfund Institute earlier this month. And, last week, Martinez was honored with the the UConn School of Business’ 2015 Faculty of the Year Award which recognized his work.

“It’s well known in the finance field that it is difficult to find good performers,” sid Martinez, who collaborated with two colleagues. “So, from our point of view, the results weren’t entirely surprising. I think for most people, who are hoping those resources are valuable, they would be very disappointed.”

The power that investment consultants wield is enormous, with assets under advisement totaling $25 trillion worldwide, including $13 trillion in the United States. Consultants are courted by the fund management companies, eager for the approval that can attract billions in additional assets to be managed. And yet the consultants do not disclose their past manager recommendations in a way which allows analysis of their performance, the trio discovered.

Not only did the funds recommended by the consultants not meet expectations, they tended to underperform other funds, noted Martinez, who describes his findings as very “sensitive” in the investment sphere.

The research has clear implications for policy, Martinez said. A disclosure requirement, similar to what is followed by research analysts, would reveal the success of past recommendations and give investors an indication of the value of the analysts’ predictions.

Martinez began the project when he worked at the Said Business School at the University of Oxford. His co-authors included Tim Jenkinson, professor and head of the finance faculty at Said, and Howard Jones, a senior research fellow there. For their research, the trio examined analysis of consultants between 1999 and 2011.

Martinez said he’s received a great deal of interest from colleagues at other universities interested in learning about the project.

“I think it will have an impact and will get people taking about it,” he said. “It certainly hasn’t gone unnoticed!”

“It is not a very transparent industry,” he said, noting that collection of data is very difficult. Martinez said he was very happy about the attention he was able to bring to the investment world and also to the School of Business. Martinez said a companion paper is already underway.

The research paper was selected as the best among 69 submissions by Commonfund, which recognized excellence in innovative research in investment management and carries a $10,000 prize, which will be awarded on March 24. The paper was chosen based on its relevance to endowments, high standard of scholarship and significant impact, according to David Chambers, one of the judges.

Chinmoy Ghosh, UConn department head in finance, said he is proud of Martinez’s success since joining the faculty in August. Martinez teaches risk management students at both the Hartford and Stamford campuses. His teaching style is highly praised by his students.

“Within a very short period of time since arriving at UConn, Jose has made a significant contribution in almost every aspect of the job,” Ghosh said. “Acceptance of his paper by the Journal of Finance, the top journal in the discipline, brings tremendous visibility and prestige to the department and the School.”

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