Portfolio Manager Ownership and Fund Performance

This paper documents the range of portfolio manager ownership in the funds they manage and examines whether higher ownership is associated with improved future performance. Almost half of all managers have ownership stakes in their funds, though the absolute investment is modest. Future risk-adjusted performance is positively related to managerial ownership, with performance improving by about three basis points for each basis point of managerial ownership. These findings persist after controlling for various measures of fund board effectiveness. Fund manager ownership is higher in funds with better past performance, lower front-end loads, smaller size, longer managerial tenure, and funds affiliated with smaller families. It is also higher in funds with higher board member compensation and in equity funds relative to bond funds. Future performance is positively related to the component of ownership that can be predicted by other variables, as well as the unpredictable component. Our findings support the notion that managerial ownership has desirable incentive alignment attributes for mutual fund investors, and indicate that the disclosure of this information is useful in making portfolio allocation decisions.

[1]  M. C. Jensen,et al.  THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE , 1976 .

[2]  H. Demsetz,et al.  Ownership Structure and Corporate Performance , 2001 .

[3]  Russ Wermers,et al.  Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses , 2000 .

[4]  Christopher R. Blake,et al.  The Performance of Bond Mutual Funds , 1993 .

[5]  Glenn Ellison,et al.  Are some mutual fund managers better than others , 1999 .

[6]  A. Shleifer,et al.  Management Ownership and Market Valuation: An Empirical Analysis , 1988 .

[7]  EVIDENCE ON THE COMPENSATION OF PORTFOLIO MANAGERS , 2006 .

[8]  Mark M. Carhart.  On Persistence in Mutual Fund Performance , 1997 .

[9]  William N. Goetzmann,et al.  Offshore Hedge Funds: Survival and Performance 1989-1995 , 1997 .

[10]  Camelia M. Kuhnen.  Dynamic Contracting in the Mutual Fund Industry , 2005 .

[11]  Christopher R. Blake,et al.  Incentive Fees and Mutual Funds , 2001 .

[12]  Vikas Agarwal,et al.  Role of Managerial Incentives and Discretion in Hedge Fund Performance , 2009 .

[13]  Glenn Ellison,et al.  Are Some Mutual Funds Managers Better than Others? Cross-Sectional Patterns in Behavior and Performance , 1996 .

[14]  John Mcconnell,et al.  Additional evidence on equity ownership and corporate value , 1990 .

[15]  Pascal J. Maenhout,et al.  Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry , 2006 .

[16]  Karl V. Lins,et al.  Changes in Equity Ownership and Changes in the Market Value of the Firm , 2004 .

[17]  Karl V. Lins,et al.  Changes in Market Values and Analysts ’ EPS Forecasts around Insider Ownership Changes , 2006 .

[18]  Peter Tufano,et al.  Board Structure, Mergers and Shareholder Wealth: A Study of the Mutual Fund Industry , 2007 .

[19]  Eric Zitzewitz,et al.  Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds , 2002 .

[20]  Ming Huang,et al.  Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization , 2004 .

[21]  A. Shleifer,et al.  MANAGEMENT OWNERSHIP AND MARKET VALUATION* An Em~k~d Amdy~s , 1988 .

[22]  Peter Tufano,et al.  Board structure and fee-setting in the U.S. mutual fund industry , 1997 .

[23]  David A. Chapman,et al.  Why Constrain Your Mutual Fund Manager? , 2002 .

[24]  Larry Y. Dann,et al.  Governance and Boards of Directors in Closed-End Investment Companies , 2002 .

[25]  A. Khorana,et al.  Top management turnover an empirical investigation of mutual fund managers , 1996 .

[26]  Edwin J. Elton,et al.  Are Investors Rational? Choices Among Index Funds , 2002 .

[27]  D. Yermack.  Higher market valuation of companies with a small board of directors , 1996 .