Peer versus Pure Benchmarks in the Compensation of Mutual Fund Managers

39 Pages Posted: 24 Aug 2019 Last revised: 25 Nov 2019

See all articles by Richard B. Evans

Richard B. Evans

University of Virginia - Darden School of Business

Juan-Pedro Gomez

IE Business School - IE University

Linlin Ma

Peking University HSBC Business School

Yuehua Tang

University of Florida - Department of Finance

Date Written: November 18, 2019

Abstract

We examine the role of peer (e.g., Lipper indices) vs. pure (i.e., market indices) benchmarks in the compensation contract of mutual fund managers using a unique hand-collected dataset. We find that 21% (29%) of our sample funds report their managers’ compensation based only on a peer (pure) benchmark, with the remaining portfolio managers compensated based on a combination of both. On the contrary to the perception of both regulators and academics, we find peer benchmarks are more difficult to beat compared to pure benchmarks. Funds with peer-benchmark compensated managers charge higher fees, but still outperform on a risk-adjusted net performance basis. Pure-benchmark compensated managers, on the other hand, exhibit lower active share and tracking error, as well as higher R-squared, consistent with less effort or ability. Lastly, managers compensated with peer benchmarks tend to work for funds that have more sophisticated investors and families with stronger incentives for internal competition. Overall, these results are consistent with market segmentation playing a role in the difference between peer and pure benchmarked compensation contracts.

Keywords: mutual funds, fund manager, managerial compensation, incentives, benchmarking, peer benchmarks, closet indexing

JEL Classification: G11, G23, J33, J44

Suggested Citation

Evans, Richard B. and Gomez, Juan-Pedro and Ma, Linlin and Tang, Yuehua, Peer versus Pure Benchmarks in the Compensation of Mutual Fund Managers (November 18, 2019). Darden Business School Working Paper No. 3441308. Available at SSRN: https://ssrn.com/abstract=3441308 or http://dx.doi.org/10.2139/ssrn.3441308

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Juan-Pedro Gomez

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain
+34 917821326 (Phone)

HOME PAGE: http://www.ie.edu/faculty/juan-pedro-gomez/

Linlin Ma

Peking University HSBC Business School ( email )

Yuehua Tang (Contact Author)

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

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