Abstract
Theory predicts that individual investor's incentives to uncover new information about asset values are low if asset prices are efficient. This, in turn, implies that heterogeneity in investment manager skill, if present, should be most clearly visible among managers that focus on asset classes with less informationally efficient prices. We investigate this argument using a large sample of syndicated bank loan portfolios managed by collateralized loan obligation (CLO) managers. Using a CLO's equity tranche cash-on-cash (CoC) return to measure performance, we find strong persistence that is robust to an extensive set of risk controls. While investors seem to derive their expectation about management quality from a manager's realized performance and allocate more capital to skilled managers, top performers cope to stay ahead net-of-fees. This questions the rationality of managers and the efficiency of the syndicated loan market.
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