Peer versus Pure Benchmarks in the Compensation of Mutual Fund Managers

59 Pages Posted: 24 Aug 2019 Last revised: 24 Mar 2021

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: March 16, 2020

Abstract

We examine the role of peer (Lipper manager indices) vs. pure (S&P 500) benchmarks in fund manager compensation. We first model the impact of peer vs. pure benchmarks on manager incentives and then test the model’s predictions using a unique hand-collected dataset. We find that 71% of managers are compensated solely or partially based on peer benchmarks. Consistent with the model, funds with peer-benchmarked managers exhibit higher active share, abnormal performance, and advisory fees than those with pure-benchmarked managers. Analyzing investment advisors’ choice between benchmark types, we find peer-benchmarking advisors have more sophisticated investors with greater performance sensitivity and are more likely to sell through the direct channel, suggestive of market segmentation.

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 (March 16, 2020). 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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