Matching skills with jobs in mutual fund industry leads to higher risk-adjusted performance, study finds

"Matchmaker, Matchmaker / Make me a match / Find me a find / Catch me a catch."

As the lyrics to the classic musical emphasizes, finding the right match is a key goal for most people. Businesses are no different. And when the skills of an employee don’t fit the parameters of the job, both parties can’t operate at their highest level of productivity.

“When employees start their careers, the jobs or positions that best match their skills are unknown to both the employees and employers,” said Gjergji Cici, the Koch Professor in Business Economics at the University of Kansas.

“By having the employees try out different jobs, both parties gradually learn about the employees’ skill profile, and at the end of this learning-by-trying process, the employees arrive at jobs that best match their skills.”

Cici explores this topic in his new paper titled “Finding your calling: Matching skills with jobs in the mutual fund industry.” Exploiting unique features of the mutual fund industry, the researchers identify instances when this matching happens for fund managers and then study the consequences. The article appears in Management Science.

Co-written by Mario Hendriock and Alexander Kempf of the University of Cologne, Germany, the paper finds that when fund managers are matched, they deliver a significantly higher risk-adjusted performance. Companies use this information to maximize value by increasing assets under the management of these managers and by collecting higher fees from these funds.

“A mutual fund manager invests in accordance with a pre-specified style, which we think of as equivalent to a job. Each investment style largely determines the investment universe and, consequently, the skills needed to invest in that universe,” he said. 

For example, the most relevant skills of a fund manager operating under a value style mandate revolve around understanding the value of assets in place and the cash-flow generating capabilities of companies in the near future. Whereas a growth manager’s skills revolve around understanding the growth opportunities that the company has, which take a longer time to realize. A growth manager, as compared to a value manager, is equipped to assess outcomes with a higher level of uncertainty.

“While managers can learn style-specific skills through training, some of these skills are arguably of an innate nature given what we know from previous research,” he said. “We conclude that a fund manager is ‘matched’ to an investment style when, after trying different investment styles, the manager returns to a previously tried style.”

To gather this information, Cici’s team identified when such managers are matched to investment styles and then examined how their performance changed after that point in time — in comparison to other managers from the same investment firm who were not matched to styles. They also used a similar approach to examine how firms exploit the knowledge that a particular fund manager was now matched and operating at a higher level of productivity.

“What surprised me most was the realization that fund managers do not know what style best suits them at the onset of their careers,” Cici said.

That realization came into focus when Cici read David Epstein’s 2019 book titled “Range: Why Generalists Triumph in a Specialized World,” which describes how some of the top musicians experimented with different instruments or music styles before finding the one that best fit their talent, after which point they excelled.

“Similarly, some of the best athletes experimented with different sports until they found the sport they were best at,” he said. “All these examples have a common theme: discovering what individuals are good at is not clear from the beginning and requires trial and error, which, of course, takes some time.”

Could companies in non-financial-based industries use these same strategies to match employees’ skills with jobs that best fit those skills?

“Absolutely,” he said. 

“Non-financial firms could rely on a similar learning-by-trying process to boost productivity of their employees. The caveat is that this process might be easier to formalize in larger firms, where the different types of jobs are more clearly defined or where there are many divisions with clearly defined functional boundaries.” 

A native of Albania who is in his eighth year at KU, Cici researches the behavior and incentives of professional money managers. His past work involving mutual funds studies the human capital of these managers and how investment companies utilize it and fund investors benefit from it.

“I would encourage CEOs to create organizational structures or processes that provide more opportunities for their employees to find the roles or tasks within the organization that best match their employees’ skills,” Cici said.

“For example, Fidelity, one of the largest mutual fund companies in the U.S., has a formal rotational program, allowing their analysts or junior portfolio managers to rotate through different sector funds. This provides training opportunities for their junior portfolio managers but also a chance for them to find a style that best matches their skills. Perhaps more companies could use such programs.”