You’re fired! New Evidence on Portfolio Manager Turnover and Performance

Abstract

We study managerial turnover for both internally managed mutual funds and those managed externally by subadvisors. We argue that turnover of subadvisors provides sharper tests of any underlying board and sponsor monitoring because these data are heavily weighted toward involuntary turnover. We find dramatically stronger inverse relations between subadvisor departures and lagged returns. We find no evidence of improvements in return performance related to departures, but flow improvements are associated with departures of poor past performers. Our findings represent new evidence on how investors, fund sponsors, and boards learn about and evaluate mutual fund management performance.

Keywords: Mutual Funds, Management Turnover, Subadvisors

JEL Classification: G11, G23