Large Fund Families Research Articles

Fund Flows, Performance, Managerial Career Concerns, and Risk-Taking

We develop a unified model of the interactions among investors, fund companies and fund managers. We show that the interplay between a manager's incentives from her compensation structure and career concerns leads to a non-monotonic (approximately U-shaped) relation between her risk choices and prior performance relative to her peers. Significantly out-performing (under-performing) managers are less (more) likely to be fired in the future, and are also more likely to increase relative risk. Ceteris paribus, relative risk declines with the level of employment risk faced by a manager. Using a large sample of mutual fund managers, we find strong support for the hypothesized U-shaped relation between relative risk and prior performance. Our findings also highlight the importance of employment risk as the underlying driver of risk-shifting by fund managers. Our theoretical model also generates additional hypotheses that link determinants of the fund flow-performance relation and managers’ employment risk to their risk-taking behavior. In support, our empirical analysis shows that funds with higher expense ratios have less convex fund flow-performance relations and less convex U-shaped relations between relative risk and prior performance; funds with younger managers, who face greater employment risk, have more convex U-shaped relative risk-prior performance relations; and managers in larger fund families have lower incentives to engage in risk-shifting, thereby leading to a less convex U-shaped relation.

Purchase and Redemption Decisions of Mutual Fund Investors and the Role of Fund Families

This paper investigates the purchases and redemptions of a large cross-sectional sample of German equity funds. We find that investors punish bad performance by selling their shares, but also have a tendency to sell winners. Investors in large fund families show higher sales and redemption rates. Furthermore, family size also affects the flow-performance relationship. On the one hand, investors in large families punish bad performance more, on the other, they also tend to sell winners more. Finally, we find that inner-family rankings play an important role for redemptions, with investors strongly redeeming their shares from intra-family losers.

Purchase and Redemption Decisions of Mutual Fund Investors and the Role of Fund Families

This paper investigates the purchases and redemptions of a large cross-sectional sample of German equity funds. We find that investors punish bad performance by selling their shares, but also have a tendency to sell winners. Investors in large fund families show higher sales and redemption rates. Further family size also affects the flow-performance relationship: Investors in large families punish bad performance more. Last, we find that inner family rankings play an important part for redemptions, with investors strongly redeeming their shares from intra-family losers.

Fund Flows, Performance, Managerial Career Concerns, and Risk Taking

We develop a unified model of the interactions among investors, fund companies, and fund managers. We show that the interplay between a manager's incentives from her compensation structure and career concerns leads to a nonmonotonic (approximately U-shaped) relation between her risk choices and prior performance relative to her peers. Significantly outperforming (underperforming) managers are less (more) likely to be fired in the future and are also more likely to increase relative risk. Ceteris paribus, relative risk declines with the level of employment risk faced by a manager. Using a large sample of mutual fund managers, we find strong support for the hypothesized U-shaped relation between relative risk and prior performance. Our findings also highlight the importance of employment risk as the underlying driver of risk shifting by fund managers. Our theoretical model also generates additional hypotheses that link determinants of the fund flow–performance relation and managers' employment risk to their risk-taking behavior. In support, our empirical analysis shows that funds with higher expense ratios have less convex fund flow–performance relations and less convex U-shaped relations between relative risk and prior performance; funds with younger managers, who face greater employment risk, have more convex U-shaped relative risk–prior performance relations; and managers in larger fund families have lower incentives to engage in risk shifting, thereby leading to a less convex U-shaped relation. This paper was accepted by Wei Xiong, finance.

The Portfolio Choice of Individual Shareholders in Large Mutual Fund Families: A Study of Demand-Side Economies of Scope

The Portfolio Choice of Individual Shareholders in Large Mutual Fund Families: A Study of Demand-Side Economies of Scope

The Portfolio Choice of Individual Shareholders in Large Mutual Fund Families

The Portfolio Choice of Individual Shareholders in Large Mutual Fund Families

Mutual Fund Proxy Votes

We examine how large mutual funds voted their proxies. Data concerning fund voting has recently become available in two new datasets. In the first, mutual funds are required to disclose their policies for making voting decisions. In the second, they are required to disclose how they actually vote on all issues. We find that the large mutual fund families have decided to vote the shares in all their funds as a block, thus increasing their voting power. They claim they do not wish to interfere in the operational management of their investments. This includes social or ethical issues. However, they feel strongly about antitakeover policies and executive compensation. Analysis of the voting data shows that the largest funds voted with management on most issues. However, they voted against management often on antitakeover and executive compensation issues. There is evidence that the funds voted against boards that were not sufficiently independent from management. We also find that voting patterns vary between funds with different investment styles. Stock pickers tended to vote with management more often. Funds with a passive investment approach, such as index funds, tend to vote against management slightly more often. Finally, we investigate the question of conflicts of interest. We compare the voting records of fund companies that are primarily mutual funds to the voting records of fund companies that are a small part of larger financial services companies. We do not find a difference in how often they vote against management.

Would Mutual Funds Bite the Hand that Feeds Them? Business Ties and Proxy Voting

This paper analyzes conflicts of interest in proxy voting by mutual funds using newly-available data on funds' voting records for 2004. We first examine mutual funds' ties to corporate clients created via pension fund business and their patterns of portfolio ownership. We then link these to proxy votes at specific firms and to overall voting policies for 21 mutual fund families, CalPERS and CREF. Among large fund families, levels of ownership are essentially independent of client relationships between mutual funds and firms, and funds are no more likely to vote with management at client firms than non-clients. At the policy level, however, we find a positive relation between the volume of pension business a fund's parent does and its propensity to vote with management.

Mutual Fund Advisory Contracts: An Empirical Investigation

ABSTRACTWe investigate marginal compensation rates in mutual fund advisory contracts and find the following. Equity and foreign fund advisors receive higher marginal compensation than debt and domestic fund advisors. Advisors of funds with greater turnover receive higher marginal compensation. Also, closedend fund advisors receive higher marginal compensation than open‐end fund advisors. Finally, we find that marginal compensation is lower for advisors of large funds and members of large fund families. We argue that these differences in marginal compensation reflect differences in advisor marginal product, differences in the difficulty of monitoring performance, differences in control environments, and scale economies.