Realism, Skill & Incentives: Current and Future Trends in Investment Management and Investment Performance

Abstract

We review the recent trends in investment management and performance research and highlight the fields expected to develop further in the future. The trend to adapt the classic CAPM and factor models seems likely to continue, with the drive for realistic factors, which best proxy the drivers of investment performance, playing a key role. The search for skill, based on enhanced benchmarks, is also a developing area, with new concepts of identification and verification at the fore. The availability of more qualitative data has allowed corporate finance themes such as agency conflict and incentives to be explored. These are some of the areas where we have seen major developments in recent years and where we expect to see continuing development.

Review of new trends in the literature on factor models and mutual fund performance

“…Cuthbertson's et al (2010) review of literature emphasises on the application of these models on performance, persistence in performance of mutual funds and false discoveries (fund manager's luck vs. skill). More recently, Mason et al (2016) focus on identifying new trends in investment management and performance following the discussion on skill versus luck, managerial characteristics and incentives. The main contribution of this paper is that it reviews the evidence from the new, augmented asset pricing models that enable 1) more accurate asset pricing by accounting for pricing anomalies or 2) less biased relative performance measurement, either relative to the fund's benchmark or relative to their peer group.…”