Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers and Boards of Directors

Abstract:     
This paper conducts a comprehensive analysis of the relation between the performance and governance structure of open-end mutual funds during the 1985 to 2002 period. Specifically, we analyze the role of fund managers in generating portfolio performance, as well as the role of fund boards, both in the ongoing performance of the fund, and in replacing underperforming managers. We find evidence that growth-fund managers with more experience and better track-records outperform their peers, which indicates that manager characteristics are key in explaining portfolio performance for these funds. Further, we find evidence of efficiencies in the labor market for fund managers, in that replaced managers underperform their peers, on average. Specifically, the incoming manager outperforms the replaced manager by one percent per year; in addition, we find that poorly performing fund managers are more likely to be replaced by funds having larger numbers of outside directors on their boards, indicating that the structure of the board is an important determinant of governance quality. However, we also find evidence consistent with manager entrenchment. That is, experienced managers perform well only when they manage large funds - experienced small fund managers underperform their less-seasoned counterparts. Overall, our findings add new insights to the ongoing debate on fund governance.

Keywords: Mutual Fund Performance, Mutual Fund Managers, Mutual Fund Governance

JEL Classifications: G23

Working Paper Series