Organizational Structure and Fund Performance: Pension Funds vs. Mutual Funds

49 Pages Posted: 3 Sep 2009 Last revised: 31 Mar 2010

See all articles by Russell Jame

Russell Jame

University of Kentucky - Gatton College of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2010

Abstract

This paper examines whether the additional layers of delegation found in the pension fund industry generate agency costs that impair pension fund performance. Corporate treasurers, who have an incentive to reduce their own job risk, tend to hire pension fund managers with low tracking error. This may result in pension fund managers underweighting profitable investment opportunities in stocks outside of their benchmark. Consistent with this hypothesis, I find that pension funds tilt their trading towards S&P 500 stocks, both in absolute terms and relative to mutual funds. Moreover, I show that the trades made by pension funds in non-S&P 500 stocks significantly outperform their trades in S&P 500 stocks. After controlling for risk and transaction costs, I estimate that that the tracking error constraint imposed on pension funds weakens the performance of their trades by roughly 30 basis points per year.

Keywords: Pension Funds, Mutual Funds, Performance, Organizational Structure

JEL Classification: G11, G23

Suggested Citation

Jame, Russell, Organizational Structure and Fund Performance: Pension Funds vs. Mutual Funds (January 11, 2010). Available at SSRN: https://ssrn.com/abstract=1465869 or http://dx.doi.org/10.2139/ssrn.1465869

Russell Jame (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

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Lexington, KY 40506
United States

HOME PAGE: http://russelljame.com

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