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Interviews with Institutional Investors: The How and Why of Active Investing

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  • F. Douglas Foster
  • Geoffrey J. Warren

Abstract

We interview professional institutional investors to learn how they choose between active and passive management, select active equity managers and construct multi-manager portfolios. We find that many of the aspects emphasized in the fund management literature, such as returns generated by the average manager and emphasis on past performance, play a relatively minor role in decisions. In contrast, judgment is found to play a central role, particularly the evaluation of people when selecting managers, the role of confidence in retaining managers, and self-perceptions about capability to identify skilled managers. Past performance is not taken at face value, but analyzed to understand underlying sources of returns. Stated reasons for preferring active management relate to whether a handful of skilled active managers can be identified and combined to generate a better expected portfolio outcome; and are only vaguely associated with the performance of the average manager.

Suggested Citation

  • F. Douglas Foster & Geoffrey J. Warren, 2016. "Interviews with Institutional Investors: The How and Why of Active Investing," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 17(1), pages 60-84, January.
  • Handle: RePEc:taf:hbhfxx:v:17:y:2016:i:1:p:60-84
    DOI: 10.1080/15427560.2015.1095754
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    Cited by:

    1. Rafał Wolski & Monika Bolek & Jerzy Gajdka & Janusz Brzeszczyński & Ali M. Kutan, 2023. "Do investment fund managers behave rationally in the light of central bank communication? Survey evidence from Poland," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 15(5), pages 757-794, February.
    2. Jiajie Du & Aaron Bruhn & Bronwen Whiting, 2020. "Observations of supervisors and an actuarial research student on the qualitative research process," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2339-2360, September.
    3. Les Coleman, 2023. "Explaining mutual fund behavior through the structure‐conduct‐performance lens," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2874-2884, July.
    4. Aaron Bruhn & Bronwen Whiting & Bridget Browne & Timothy Higgins & Chong It Tan, 2017. "Introducing Enterprise Risk Management Into the University Classroom: A Case Study," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 20(1), pages 99-131, March.

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