Fund Flows and Asset Valuations of Bond Mutual Funds: Effect of Side-by-Side Management

Abstract

We compare fund flows and asset valuations of bond mutual funds whose managers concurrently manage portfolios with performance-based fees and those whose managers do not. We find that bond mutual funds whose managers concurrently manage portfolios with performance-based fees receive less fund flows and overstate their asset values. The reduction in fund flows and overstatement of fair values are amplified when these mutual funds underperform their peers. The overstatement of fair values is also amplified when these funds exhibit redemption risk. Our findings suggest that conflicts of interest associated with “side-by-side management” in mutual funds result in adverse operational and reporting outcomes besides underperformance.

Keywords: Investment Advisor, Side-by-Side Funds (SBS Funds), Bond Mutual Funds, Fund Flows, Fair Valuation

JEL Classification: G23, M41