Prudent Man or Agency Problem? On the Performance of Insurance Mutual Funds

46 Pages Posted: 26 Oct 2004  

Xuanjuan Chen

Shanghai University of Finance and Economics

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Tong Yu

University of Cincinnati

Date Written: August 2006

Abstract

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

Chen, Xuanjuan and Yao, Tong and Yu, Tong, Prudent Man or Agency Problem? On the Performance of Insurance Mutual Funds (August 2006). Available at SSRN: https://ssrn.com/abstract=589801 or http://dx.doi.org/10.2139/ssrn.589801

Xuanjuan Chen

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Tong Yao

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Tong Yu (Contact Author)

University of Cincinnati ( email )

P.O. Box 210195
Cincinnati, OH 45221-0195
United States
4019548606 (Phone)
4019548606 (Fax)

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