Mutual Fund Competition and Fund Manager Strategy Choice
40 Pages Posted: 4 Nov 2020 Last revised: 6 Nov 2020
Date Written: October 16, 2020
The increasing number of mutual funds and assets under management of the industry are credited with restricting opportunities and stifling incentives for fund managers to generate alpha. I show that some managers are able to adapt to the more competitive market environment by tilting their investment strategy towards 'quality'. Using the fund's loading on the QMJ factor to proxy for quality management, I find that high quality funds outperform their peers, and generate annual alphas of 2.88%. Besides peer competition, a clientele effect seems to influence the choice of strategy. Clients of high quality funds are more sophisticated and focus on risk-adjusted returns, while those of low quality funds fit the description of uninformed investors, and seem unresponsive to both gross returns and alphas.
Keywords: Mutual funds, portfolio holdings, fund performance, fund manager skill
JEL Classification: G21, G23
Suggested Citation: Suggested Citation