Not so dorée.
Greenwood and Nagel performed a simple study: they took Morningstar data on the portfolio composition of fund managers during the technology bubble, and using age as a proxy for experience, looked at whether younger managers were more likely to bet on tech stocks. The findings are a nice example of reality meeting expectations:
…leading up to the peak in March 2000, younger managers strongly increase their holdings of technology stocks relative to their style benchmarks, while older managers do not. Our benchmark adjustments rule out simple compositional explanations, such as the possibility that younger managers are more concentrated among growth funds. We also show that younger managers actively rebalance their portfolios in favor of technology stocks – hence the results are not driven simply by price changes of existing positions.
The economists conclude that younger managers are “trend chasers.” And yes, by implication, part of the cause of bubbles.
But the interesting stuff is what only gets hinted at. Why, for example, do funds managed by those younger managers see “abnormal inflows” from investors during a boom but not “abnormal outflows” during a crash?
Youth and inexperience are certainly part of the picture.
But the bigger issue is chasing yield. Which isn’t an age thing. As Greenwood and Nagal seem to hint, investors in these funds play their part: pouring money into higher-yielding strategies – which are, inevitably in the beginning, those managed by less experienced, less risk-averse managers.
The bigger picture, then, is that riskier behaviour is rewarded in a bubble.
There’s a market for riskier fund managers. A market which “youth” certainly fills.
But if it didn’t – if, say, a barrier was enforced, which meant only those over 35 could be qualified fund managers (after perhaps, a 10-year apprenticeship to nonetheless guarantee experience) would the market be less disposed to bubbles? Would there be any less a market for riskier strategies? Or for that matter, high yields?
Or would 35 be the new 25?
Do men make history, or does history make men?