Effort Substitution and Performance Shift of Multi-Tasking Mutual Fund Managers

Abstract

We examine performance shift and managerial effort substitution for the practice of multi-tasking in the mutual fund industry. Using the pairing of newly issued and incumbent funds under concurrent management, we show that fund managers shift performance from incumbent funds to newly issued funds. Such outperformance of newly issued funds relative to incumbent counterparts can be attributed to managerial effort substitution. In order to examine managerial effort substitution, we compare the portfolio holdings of a newly issued fund that differ from the holdings of its incumbent counterpart and use the difference as a proxy for managerial effort substitution. We decompose the difference into three components: The same stocks as in the incumbent fund but with deviating portfolio weights, newly selected stocks that are not included in the incumbent fund, and old stocks that are included in the incumbent fund but not in the new fund. The empirical results indicate that the outperformance of newly issued funds against their incumbent counterparts can be attributed to the selection of new stocks in newly issued funds. Furthermore, we find that incentives embedded in the marginal impact of managerial effort on performance measures can help explain effort substitution and resulting performance shift. Overall, the results support the prediction of our multi-task principal-agent model.

Keywords: mutual funds, multi-tasking, fund managers, effort substitution, performance shift, incentivesma separated

JEL Classification: G11, M52