The Effect of Ultimate Ownership on Unit Trust Performance

Abstract

Following privatisations in the 1980's, the UK financial industry embarked on a series of demutualisations, which developed into a global trend in the late 1990's. This structural shift has generated numerous debates in academic circles concerning various managerial issues of mutual versus stock owned companies. By exploring the link between ultimate organisational form and the U.K unit trust performance, this paper contributes to this debate in two ways. Firstly viewed from agency theory, the performance analysis is interesting because the analysis can capture the conflict of interests between owners and customers as Mayers and Smith (1986) suggested. In more general term, if ultimate ownership of a unit trust management company is related to the ability to provide superior performance via its incentive or managerial mechanism, the type of ultimate ownership should be a factor in explaining the performance of individual unit trusts. Secondly, the performance analysis of individual unit trusts can provide evidence of the efficient market hypothesis. In evaluating performance of unit trusts, a number of conventional measurers are available. However, it is essential from the viewpoint of owner-customer conflict that the performance measure must incorporate three components, e.g. risk, return and fees of an individual unit trust into the measurement framework. In order to consider the three factors simultaneously, DEA is employed in this study. The results of this paper suggest that there are no significant differences in terms of the DEA performance measure across the different ownership groups. The results hold after controlling for various influential factors such as the size of the unit trust and the company's total asset. Consequently, there is no compelling reason to believe that the performance of individual unit trusts is dependent either on the management company's ownership or on the size of the unit trust.