http://www.chicagogsb.edu/capideas/jan08/3.aspx

http://www.hbs.edu/research/pdf/08-055.pdf

This is one of the five topics that Ben posted in his blog recently.

How do mutual fund managers of billions of dollars choose which stock to invest in?

The article in the link above and the video in the second link reveal an interesting discovery. That’s right; mutual fund managers turn to their educational network. The research shows that the fund managers invest heavily on corporations which have senior officers who have gone to same educational institution as the fund manager. The strength of the connection varies from being weak to strong; study of weak connection reveals that the fund manager and the senior officer might have went to the same university but different schools with in the university at different time. The strongest connection shows that the fund manager and the senior officer went to the same school with in the same university during same academic years.

The results of the research shows that the investment made from educational netowkr performs significantly better than the investments without any social connections between the fund manager and the senior officer. There are few conjectures as to why the connected portfolios perform better than the non-connected portfolios. First, perhaps there is a strong information flow between the fund manager and the senior officer who can help the fund manager make better investment decisions. Second, the fund manager is able to judge the senior officer in terms of his/her skills, personalities, and capability. If the senior officer seems bright enough, the fund manager will proceed to invest in that specific corporation.

We can relate the result of this research with the concept of homophily in networks. Essentially, what these fund managers are doing is seeking potential investment opportunities from people who are like themselves. Not only did the senior officers of corporations attend the same university as the fund managers but they also belong in the same industry (Finance). There is one more interesting fact that I picked up that might deal with the concept of homophily; whenever a new fund manager replaced the old one, he/she immediately reduced the holdings in corporations that the old manager had and invested heavily into firms that the new manager had connections with. Perhaps, the new manager does not feel comfortable in investing in firms that she does not personally have connections with. Therefore, she, just like the old manager, seeks for potential investment opportunities within her own education network.