Manager selection: How Yale finds the best 50 from thousands of fund managers

You have €3 million to invest and your investment advisor recommends a fund with an “excellent track record”. The statistics are impressive: 15% excess return in the last 5 years. But if you ask Yale, that may be coincidence, not skill. Yale screens over 1,000 fund managers per year, but only accepts <50 into their portfolio – an acceptance rate of under 5%. This article will show you how to evaluate managers like Yale.

The manager selection problem: 1,000 managers, but which ones?

The academic research is clear:Average active fund performance does not beat the index. Over 85% of active fund managers underperform their benchmark over a 15-year period. Worse still, the fund managers who have outperformed over the last 5 years arenot likely to do it in the next 5 years(Ellis, Charles: Winning the Loser's Game).

However, there is a small group of managers who consistently outperform. Yale pays for these managers – but only if they meet certain criteria.

The problem for retail investors: They don't have the time, resources or data to screen 1,000 managers. That's why we'll show you how Yale built its system and how you can adapt it.

Yale's four manager selection criteria

Yale uses a structured system with four pillars:

1. Long-term absolute return (>10 years)
Yale ignores 5 year periods. The manager must have outperformed for at least 15 years - after fees. A manager making 12% with 2% fees is not attractive. Yale is looking for 15%+ returns with <1% fees (for larger positions).

2. Independence & Reputation
The manager must be a small, focused group. Yale avoids large institutions (>€500M AUM). The reason: Large-size investments destroy alpha. A manager managing €3bn cannot generate the same 20% returns as with €300m.

3. Alignment & self-investment
Yale checks how much of the manager's assets are in its own fund. A manager who has <20% of personal assets in his fund is suspect. Yale prefers managers who have >50% personal money invested - because their interests are aligned.

4. Data Verification & Transparency
Yale demands detailed analysis: What does the monthly drawdown look like? What are the volatility and Sharpe ratio? A manager who is unwilling to share this data will be rejected.

The Performance Illusion Test: Track Record vs. Luck

Yale's greatest focus isAbility to distinguish from luck. The statistical answer is simple: If a manager consistently outperforms over 15 years (with <3 periods of underperformance), it is statistically unlikely that pure luck is to blame.

But Yale goes even deeper. You investigate:

• Consistency of Outperformance: In how many individual years has the manager outperformed? (Yale is looking for >80% of years)
• Volatility & Drawdown: Did the manager earn the return with extreme volatility? (A manager with 20% volatility that makes 15% returns is more attractive than one with 25% volatility)
• Downside Capture: How bad was the manager in bear markets? (Good managers lose less in crashes)
• Style Stability: Did the manager change his style to chase trends? (Bad sign)

The Yale manager portfolio: Why diversification among managers also works

Yale does not invest in a “super manager.” Instead, they have a portfolio of 40-50 managers, each with <5% portfolio allocation. The reason:Even the best managers have performance cycles.

A manager can perform very well for 3-5 years, then perform poorly for 2 years. By diversifying among managers, Yale can ensure that a bad year under one manager is offset by strong performance under another.

This works because Yale selects managers whoare decor related– that is, their successes are based on different ideas, not on the same trends. A value manager and a growth manager perform well in different markets.