Financial institutions are no better at picking stocks and timing the market in their own fields than they are in industries outside the financial sector, according to new research by Cass Business School in London.

The study found that mutual funds, banks and insurance companies overwhelmingly fail to convert their ‘home-field advantage’ – buying and selling shares in their own industries – into actual investment returns.

“The fact that we do not find robust evidence of outperformance by three major types of institutional investor in their own backyard, despite studying the world’s largest stock markets over a three decade span, is striking,” said Cass academic and co-author of the study Dr Aneel Keswani.

Cass Business School examined every trade over US $200,000 made in the US stock market between 1980 and 2009 to discover whether mutual fund companies, banks and insurance companies outperform when selecting stocks and timing the market in their own industries versus others.

The authors found some evidence of industry timing as a whole, but remarkably, financial institutions were able to time unrelated industries more successfully than their own. The study also failed to find robust evidence of superior stock selection by money managers in their own industries.

“If financial institutions exhibit any investment skill at all, it should be particularly evident when they invest in stocks of companies that are involved in the same business as themselves,” said Keswani.

“Yet we find that institutions do not display any superior investing ability in their own industry, either at the individual stock or at the aggregate industry level. This is in spite of our focus on trades that are large in absolute and relative terms.

“When we look at entire financial institutions, there is no evidence of investment ability either at the individual stock, or the industry level, despite the fact these institutions are investing in their own backyard. Seen against the backdrop of previous studies that have shown evidence of fund manager ability, a lack of evidence of skill in own-industry trading is clearly a surprising and thought-provoking result.”

So-called ‘expert networks’ and the perceived importance of financial analysts who specialise in specific sectors has also been called into question.

“The idea that in expert hands public information can be used to beat the market is intuitively appealing, and is the reason behind the proliferation of so-called ‘expert network’ firms. However, we show that for several important industries in the financial services sector, greater industry expertise does not translate into superior investment returns.”

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