GLOBAL - A new academic study has suggested that investment managers' pay should be tied to their skills in using information.

And it also called for greater disclosure of the information that managers use to make investment decisions.

 The 43-page study - ‘Fund manager use of public information: new information on managerial skills' - was written by Marcin Kacperczyk and Amit Seru and appears in the Journal of Finance.

"We show theoretically that the responsiveness of a fund manager's portfolio allocations to changes in public information decreases in [line with] the manager's skill," the academics write.

They assess managers' sensitivity to information in the public domain, which they term RPI - "reliance on public information".
 
They say: "Consistent with RPI containing information related to managerial skills, we find a strong inverse relationship between RPI and various existing measures of performance, and between RPI and fund flows."

And they add that if the degree of reliance on information in the public domain is less transparent to outside investors then "one may call for more disclosure of information of this type".

The researchers argue that ‘RPI' "may be useful in setting managerial contracts".

This is because the problem in rewarding portfolio managers based on abnormal performance alone is that it could be luck that causes the performance, they argue.

"Our analysis suggests that it would be desirable for management to also investigate how much their managers rely on information in the public domain and to set incentive mechanisms accordingly."

Kacperczyk is at the Sauder School of Business at the University of British Columbia while Seru is at the University of Michigan's Ross School of Business.

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