Review of Financial Studies, Forthcoming
55 Pages Posted: 9 Aug 2011 Last revised: 18 Dec 2012
Date Written: May 9, 2012
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.
Keywords: Governance, Mutual funds, Institutional investors, Performance sensitivity, Identification
JEL Classification: G23, G34
Suggested Citation: Suggested Citation
Evans, Richard B. and Fahlenbrach, Rüdiger, Institutional Investors and Mutual Fund Governance: Evidence from Retail – Institutional Fund Twins (May 9, 2012). Swiss Finance Institute Research Paper No. 11-31; Review of Financial Studies, Forthcoming; Swiss Finance Institute Research Paper No. 11-31; Darden Business School Working Paper No. 1907149. Available at SSRN: https://ssrn.com/abstract=1907149 or http://dx.doi.org/10.2139/ssrn.1907149