Fast Cars, Low Returns

21 February 2019  |  Professor Stefan Mittnik, PhD
Fast cars, low returns: what a fund manager’s car can reveal about their performance.

A study from last year, The Misguided Beliefs of Financial Advisers, analysed the personal portfolios of 4,400 Canadian independent financial advisers and compared them with the portfolios they managed for their clients. The results (after analysing £11bn of investments, across half a million client portfolios, over 14 years) showed that the more risk the advisers took with their personal account, the riskier their client’s portfolio became. It also revealed that the more expensive the funds held by the adviser, the more expensive the funds were in the client's portfolio. On average, client and adviser portfolios underperformed their benchmarks by three percentage points every year - a disappointing result given that investors would most certainly expect better results when seeking professional help for their investments.
In light of these insights, you might be curious to take a look at your adviser’s personal portfolio. But while he or she may not be inclined to reveal those details to you, there are other ways to find out what their attitude to risk might be.

More Horsepower, More Risk

One test is simple: find out what car your investment manager drives. Why? Because managers who are passionate about sports cars tend to take more risk. The problem: the riskier bets they take do not generate the higher returns one expects for the additional risk. This is the conclusion of a study, published in the renowned Journal of Finance, by financial researchers Stephen Brown, Yan Lu, Sugata Ray, and Melvyn Teo.
The scientists observed the risk and return characteristics of 1,144 US hedge funds from 2004 to 2015 - as well as the cars driven by their managers. The cars were divided into three groups: boring, normal and exciting. Sporty cars with lots of torque and horsepower were categorised as exciting, while the safer and more practical cars with more passenger volume were labelled as boring. The investment performance was determined by the Sharpe ratio, a measure for risk-adjusted returns. It divides a fund’s average annual excess return (fund return minus risk-free return) divided by its volatility.

Granny Drivers in the Fast Lane

The average Sharpe ratio of fund managers with sports cars was 0.50. This is 40 percent below the average of the funds sampled (Sharpe ratio: 0.84). However, fund managers who drove the safer and more practical cars were 58 percent above average, with their Sharpe ratios being the highest.
A quick example illustrates the implications for an investor: If two funds, one managed by a sports car aficionado and one by a conservative family van driver, both have an identical risk (10 percent annual volatility), the latter will generate an average return of 13.3 percent a year (assuming a risk-free interest rate of zero), while the former will barely make 5 percent a year. In other words: After ten years, an investor could enjoy an increase of their assets by 249 percent if invested with the family van driver, compared to just a quarter of that - or 62 percent - with Mr Sportscar.
The researchers also analysed the direct relationship between engine performance and fund performance. Had our sports car driver decided on a car with an extra 100 hp, his fund's return would have dropped by almost another percentage point per year.

Big Data Meets Big Dating

Driving a fast car can be classified as one particular form of sensation seeking. Another facet of this behaviour was analysed in an empirical study by the Miami Business School: having an affair. They found that people who are sexually active outside of their relationships take more financial risk than monogamous partners. You might wonder how they were able to collect such sensitive data. In 2015, hackers attacked the dating site Ashley Madison - which was primarily aimed at married people - with the slogan "Life is too short. Have an affair." The hackers published 25 gigabytes of customer data online, including names, addresses and credit card transactions detailing dating services.
The researchers found that neighbourhoods with above-average extra-marital “Sensation Seeking” also had above-average real estate foreclosures. You may think that frequent infidelity would lead to more divorces, driving up the foreclosure rate. That's not the case. Instead, the scientists showed that people who are prone to infidelity have a higher tendency to finance real estate purchases with particularly low downpayment - a sign of an increased risk appetite when it comes to financial matters.

Lurking in the Office Car Park

Sensation Seeking and economic behavior - there is no shortage of evidence for the connection. The most useful scientific study for private investors, however, is likely to be the one about car choices of finance professionals. You might not want to ask your adviser about their extra-marital affairs, but it’s easy to casually drop the subject of cars into conversation. If that doesn’t work, you can still try to spot them leaving work in the office car park.
Although I am not an investment adviser or fund manager, I am involved in the practical implementation of scientific findings from the world of finance, including the design of our investment algorithm. So I wonder: Could my “Sensation Seeking” preferences have influenced our investment model’s programming code? It might reassure you to know that for 19 years I drove a Vauxhall Vectra - perhaps the most boring of all estate cars, and I recently inherited my daughter's Hyundai. Another study which related personality types to car models tells you what that says about me. Apparently, Vauxhall drivers have modest means, aren’t attractive or sporty, but are stuffy and serious. As a Hyundai driver I'm now less stuffy and serious, but remain unattractive and unsporty. Further to this, income and occupational status fall significantly below the average for Hyundai drivers. Not exactly flattering, but perhaps ideal for a financial academic and investment strategist. Regardless, the grass looks greener on Tesla drivers’ lawns. They have higher incomes, and are considered more successful. They are environmentally conscious, slim, and sporty. And the icing on the cake? Just a touch of arrogance. They have just about everything.

Image: Roberto Hernandez/

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Stefan Mittnik
Professor Stefan Mittnik, PhD
Stefan is Professor of Financial Econometrics and Director of the Centre for Quantitative Risk Analysis at the Ludwig Maximilians University in Munich. He served on the Research Advisory Board of the Deutsche Bundesbank and was research director at the CFS and the Institute for Economic Research in Munich. He has spent about 30 years researching, analysing, modelling and forecasting financial risk.