Institutional investors often wonder whether their manager hire and fire decisions lead to excess returns or whether terminations take place just before a rebound and hires just before a fall. In the spirit of the seminal study by Wahal and Goyal, we surveyed the manager selection experience of 12 California public plans, and this is what we found:
- Managers demonstrated excess returns prior to being hired, but performance slipped thereafter;
- Managers were terminated following underperformance, but performance recovered following termination; and
- Terminated managers tended to outperform their replacements.
The broad implication of our findings, like that of the earlier Wahal and Goyal study, is that manager termination and replacement should not be based on performance alone, and a modicum of patience with active managers may very well improve overall long-term performance.