Mutual Fund Corporate Culture and Performance

Abstract

There are several reasons why mutual fund corporate culture should predict fund performance. First, at funds with excellent corporate cultures, employees are recognized for their contributions and are involved in decision making. This usually translates into employees working harder, being more productive, and more committed to the firm. All things being equal, this should enhance fund performance as funds with excellent corporate cultures will not have to engage as regularly in the expensive process of hiring and training new employees as other funds. Second, a fund with a strong corporate culture will be investor driven rather than sales driven. Consequently, it will pursue policies that always have the investor in mind, e.g., closing funds that are too large, not using trendy funds just to attract greater assets, keeping fees fair, not using soft dollars, and implementing redemption fees to stop market timing. Such policies should improve fund performance for the investor as compared to funds that do not practice these policies. Third, a fund with an excellent corporate culture will communicate well to its investors. Such a fund will put out shareholder letters that explain in-depth what they are buying, not buying, and what went right as well as what went wrong. This effective communication should help investors place the current investing environment into perspective and thus can help them think longer term and avoid making fleeting decisions. As a result such a fund will have better performance as they will have long-term investors that are less likely to engage in market timing strategies. In this paper we test if the above ideas hold as we examine if a mutual fund’s own corporate culture predicts fund performance. To do this we use Morningstar’s corporate culture grades for mutual funds and then examine the ability of these corporate culture grades to predict risk-adjusted performance of domestic equity funds over the period 2005-2010. Using methods that are robust to survivorship bias, we find there is little significant evidence that corporate culture predicts better fund performance. In the end having a fund with a strong corporate culture may insulate a mutual fund from scandal but will not result in the mutual fund outperforming the market.