Mutual Fund Performance and Manager Assets: The Negative Effect of Outside Holdings
43 Pages Posted: 27 Nov 2016 Last revised: 6 Dec 2019
Date Written: February 23, 2017
We explore the relation between a given fund’s performance and the total assets managed by the fund’s managers, including those holdings that are outside the fund of interest. 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 fund size. Additional results suggest the effect is related to manager attention: the negative performance relationship is driven by outside stock holdings that don’t overlap with the fund of interest and, in contrast to fund size, the effect of outside holdings does not increase with their size. We address endogeneity concerns using fund mergers as an instrument for manager holdings and using recursive demeaning. Our results suggest that manager assets are a significant determinant of fund performance and that limited manager attention plays a role in this effect.
Keywords: mutual fund managers, performance persistence, diseconomies of scale, diseconomies of scope
JEL Classification: G23
Suggested Citation: Suggested Citation