Institutional Investors and Mutual Fund Governance

Abstract

We investigate whether mutual fund retail investors benefit from investing in mutual funds whose managers also offer a similar, but separately managed, institutional mutual fund. Using a sample of twin retail and institutional funds, we show that institutional investors are better than retail investors at evaluating fund performance, using metrics such as expense ratios and risk-adjusted performance. Retail investors achieve a higher risk-adjusted performance if the fund manager also manages an institutional mutual fund. We exploit cross-sectional differences in the creation of the institutional and retail mutual funds to examine whether institutional investors are merely better at selecting managers, or whether their presence reduces agency problems between mutual fund managers and investors.