Mutual Fund Performance and Manager Assets: The Negative Effect of Outside Holdings

Abstract

We explore the relation between fund performance and the assets managed by the fund’s managers that are outside the fund. Controlling for fund size, we find a negative relation between fund performance and the size of the manager’s outside holdings, the number of other funds managed, and the number of distinct fund categories managed. The economic magnitude of the effect is comparable to that of fund family size and turnover, though not as large as that of fund size. Additional results suggest the effect is related to manager attention: the performance effect is driven by outside holdings that do not overlap with those held within the fund; in stark contrast to fund size, the incremental effect of additional outside holdings is non-monotonic; and outside holdings in sub-advised funds have little effect on performance. We address endogeneity concerns in two ways: using fund mergers as an instrument for manager holdings and using recursive demeaning. Our results suggest that manager responsibilities outside a fund are a significant determinant of fund performance and that limited manager attention plays a key role in this effect.

Keywords: mutual fund managers; diseconomies of scale; outside holdings; attention; price impact.

JEL Classification: G23