Institutional Investors and Mutual Fund Governance: Evidence from Retail – Institutional Fund Twins
Richard B. Evans
University of Virginia - Darden School of Business
Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
May 9, 2012
Review of Financial Studies, Forthcoming
Swiss Finance Institute Research Paper No. 11-31
Darden Business School Working Paper No. 1907149
Some investment advisors offer multiple versions of a fund with the same manager and highly correlated returns. But these “twin” funds are separate portfolios for different investors with differing abilities to select and monitor managers. We investigate whether retail investors benefit from investing alongside their institutional counterparts. We find that retail funds with an institutional twin outperform by 1.5% risk-adjusted annually. We demonstrate that institutional twin investors are more sensitive to high fees and poor risk-adjusted performance than retail investors. Using a matched sample of retail and institutional twin funds, we analyze whether the difference in sensitivities can help explain the better performance by focusing on changes to fees and portfolio composition of retail funds after the creation of an institutional twin. We find that after the institutional twin is created, expenses decrease and measures of managerial effort increase, consistent with the reduction of agency problems from greater monitoring.
Number of Pages in PDF File: 55
Keywords: Governance, Mutual funds, Institutional investors, Performance sensitivity, Identification
JEL Classification: G23, G34
Date posted: August 9, 2011 ; Last revised: December 18, 2012
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