The Company You Keep: Investment Adviser Clientele and Mutual Fund Performance

Abstract

This study examines how the composition of an investment adviser’s client base (identified via Form ADV filings) relates to the performance of its mutual funds. Investment advisers catering to institutional clients realize statistically and economically superior risk-adjusted mutual fund performance relative to retail-oriented advisers. Subsequent tests identify the channel(s) responsible for the relationship. The evidence is consistent with both a causal, governance mechanism (i.e., Evans and Fahlenbrach 2012) as well as inefficiencies stemming from the costly search mechanism of the Gârleanu and Pedersen (2018) model for asset management. The results suggest that institutional clients can identify better performing investment managers, particularly in market segments where retail mutual fund investors face higher search costs.

Keywords: Investment advisers, mutual funds, institutional investors, Form ADV

JEL Classification: G11, G23