Stock Picking and Alumni Networks

Most business school professors don’t spend a lot of time researching alumni networks.  However, that subject is exactly what my finance professor, Lauren Cohen, has been researching for the last several years at Harvard Business School.

Specifically, Professor Cohen has looked at the influence alumni networks have on a mutual fund manager’s ability to pick stocks.

“Our results reveal a strong pattern, in both stock holdings and returns: U.S. mutual fund portfolio managers placed larger concentrated bets on companies to which they were connected through an education network. And the fund managers performed significantly better on those connected positions than they did on nonconnected ones, to the tune of 7.8% a year.”

7.8% a year is serious outperformance!

Interestingly, the closer the connection, the greater the outperformance.

So what does this mean? No, it isn’t that fellow alumni support insider trading.  Professor Cohen and his colleague sum it up as follows:

The depth and persistence of college networks means that fund managers and analysts amass—incidentally and on purpose—detailed information about fellow graduates. They’re more likely to have met each other or have common acquaintances. They understand what it means if a person belonged to a certain club or participated in a specific study program. They may know people who hired them previously. And so on. All this helps them better assess executives’ potential as leaders and business owners.”

See the full article from the Harvard Business Review here.

What do you think?

Ever True!

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