Prudent Man or Agency Problem? On the Performance of Insurance Mutual Funds
46 Pages Posted: 26 Oct 2004
Date Written: August 2006
This study analyzes the performance of active equity mutual funds managed by insurance companies and their subsidiaries. We document that insurance funds underperform non-insurance peers by more than one percent in average annual returns. Two possible explanations are examined: conservatism in risk-taking and lack of incentive to pursue superior performance. There is no evidence that insurance funds make less risky investments; instead they have lower risk-adjusted returns. Further, insurance fund flows are less sensitive to performance when they perform poorly, and the investors they attract appear to be less sophisticated. Finally, across insurance funds, those whose parents spend heavily on advertising, those directly established by insurers or using parents' brand names, and those whose managers simultaneously manage a substantial amount of non-mutual-fund assets, are more likely to underperform. We conclude that insurers' efforts to cross-sell mutual funds may aggravate agency problems that erode fund performance.
Keywords: Mutual fund performance, flow, agency problem, insurance
JEL Classification: G11, G22
Suggested Citation: Suggested Citation