The World’s Best Asset Managers?
I just read a paper about some of the world’s best money managers. Depending on how you measure their performance, they’ve outperformed the S&P 500 on a risk-adjusted basis by 3% – 8% for a 17-year period. The amazing thing about these phenomenal money managers is that they don’t know how to balance a checkbook. They are Congressmen.
The paper is called, “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives.” It’s written by four academics (Alan J. Ziobrowski, James W. Boyd, Ping Cheng and Brigitte J. Ziobrowski). The paper was just published in Business and Politics (2011). Here’s the link.
The authors studied the performance of stock trades done by members of Congress from 1985 – 2001. They were inspired to do this study after conducting a similar study on the trading performance of Senators. Here are some of the key findings:
1. Stocks purchased by Representatives beat the market by 55 basis points per month (approximately 6% annually).
2. Newer Representatives seems to outperform more senior Representatives. Stocks purchased by Democrats outperformed the stocks purchased by Republicans when calculated on a trade-weighted basis. (Democrats were in power for ten of the 17 years studied.)
3. The authors emphasize that members of Congress have access to non-public information that could have a substantial impact on certain businesses, industries or the economy as a whole.
4. Representatives do not have any significant restrictions on their trading. They are bound by “The Ethics Manual for Members, Officers, and Employees of the U.S. House of Representatives.” (My guess is that the authors of that manual also wrote “The Good Citizen Manual for College Football Players”.) This manual forbids representatives from using their position for private profit or using confidential information for personal gain. (I don’t believe it says anything about texting pictures of your appendages.)
5. Representatives must file a Financial Disclosure Report each year. These reports can be complicated – “sometimes containing more than 100 pages for a single Representative.”
6. The authors’ earlier study showed that Senators outperformed the market by 85 basis points per month (approximately 10% per year) from 1993 to 1998. There was no statistical difference based on political party. Younger Senators did outperform older Senators.
7. There has been legislation proposed in Congress to limit trading. It’s called the Stop Trading on Congressional Knowledge (STOCK Act).
8. One of the most amazing things in the paper (to me) was that the returns included in the paper did not even include IPOs! I assume that the outperformance would have been significantly higher if these transactions had been included.
9. Only a minority of Representatives (never more than 27%) trade per year. But, the number has been increasing significantly over time.
10. The median number of transactions per year is between three and four. But, the mean is between eight and 21 purchases per trader each year. This tells you that there are a handful of really big traders.
11. The average annualized return for an “equal weighted” portfolio is approximately 2.8% higher than the market portfolio (adjusted for risk). But, the average annualized return for the “trade weighted” portfolio is approximately 7.6% higher than the market portfolio. The idea is that Representatives invested more in better performing stocks.
12. After making adjustments to account for the high volume traders, the evidence of outperformance remains consistent.
13. On average, Representatives favored growth stocks with momentum.
14. Representatives tended to sell a bit early. (Of course, that’s a bit strange because it would imply they weren’t greedy…)
15. The authors suggest the examination of the relationships between campaign contributions, common stock acquisitions and abnormal returns. They also suggest more timely disclosure (rather than once per year).
For me, this is a really interesting paper. Assuming that it is all correct, it implies that these politicians may be trading based on superior information. But, my gut tells me that there could be more to this story.
It seems clear that there are a few Congressmen who are making a lot of trades and crushing the market. The paper also makes clear that this has been true for a long period of time. It surprises me that a Congressman would have enough information to outperform while making many trades. As a result, my gut feeling is that something else must be going on.
Obviously, I don’t know what has really happened. But, I think back to all of the academic studies that showed that companies which used stock options outperformed the market. Then, one researcher (Eric Lie) really examined the data and found out that the real thing going on was “backdating” of options.
I have a feeling that there’s more of a story here. I would love to know how many of these Representatives (who are outperforming) are managing their own money as opposed to having outside money managers. I would not be surprised to find out that there’s more to this story – such as financial firms allocating profitable trades to Congressmen (after the fact), or some other story. One of the first things I’d like to see is how many IPOs some of these Congressmen invested in – as this may be evidence of preferential treatment. My point is simply that this is very suspicious performance, but I really question whether a Congressman could outperform based on the information that is available to him. Maybe, maybe not.
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