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transcript
Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers
and Boards of Directors
Bill Ding, SUNY at Albany
Russ Wermers, University of Maryland (Presenting)November 8, 2012
My New Textbook(Available soon via amazon.com)
April 20, 2023 Mutual Fund Managers and Directors Slide #2
April 20, 2023 Mutual Fund Managers and Directors Slide #3
Relevance of Fund Managers The mutual fund performance literature generally ignores
the role of fund managers and fund governance (e.g., Jensen (1968), Grinblatt and Titman (1989), Wermers
(2000), Carhart (1997), and Chen, Hong, Huang, and Kubik (2005))
Stockpicking talents may reside at the managerial level, rather than exclusively at the fund level High compensation [median base plus bonuses (2004) is $340K
—higher than median hedge fund manager compensation] Skill development Relationship development (pre-Regulation FD and post-
Regulation FD)
April 20, 2023 Mutual Fund Managers and Directors Slide #4
The Public Perception of Managers
Mutual fund “star” managers are profiled regularly by the Wall Street Journal, New York Times, Bloomberg, and other media sources
Peter Lynch, formerly of Fidelity Magellan has reached almost legendary status
Bill Miller, of the Legg-Mason Value Trust Fund, has beaten the S&P 500 for 15 years in a row—prior to 2007—and became media “star”
April 20, 2023 Mutual Fund Managers and Directors Slide #5
Recent SEC Adoption of Enhanced Portfolio Manager Information
On August 18th, 2004, the SEC adopted “Disclosure Regarding Portfolio Managers of Registered Investment Companies,” which requires disclosure of: Manager identity, including “teams” (in fund
prospectus) Name, title, experience with fund, career experience
Other accounts managed by each manager (in SAI) Compensation method for each manager (in SAI) Ownership by fund manager of fund shares (in SAI)
April 20, 2023 Mutual Fund Managers and Directors Slide #6
Past Research on Mutual Fund Managers
Manager characteristics and fund risk-taking and performance: Chevalier and Ellison (1997 JPE, 1999 QJE, 1999 JF)
Manager contribution vs. fund contribution to performance (Baks (2004))
Manager changes: Khorana (1996, 2001)
April 20, 2023 Mutual Fund Managers and Directors Slide #7
If Fund Managers Matter, then the Following Issues Become Important
Is scarce fund manager talent allocated efficiently in the mutual fund industry?
In an efficient fund manager labor market, Underperforming fund managers get demoted or fired
(and/or suffer outflows) Outperforming fund managers get promoted (and/or
attract inflows) Therefore, more experienced managers (who have
also exhibited better past talents) manage bigger funds
April 20, 2023 Mutual Fund Managers and Directors Slide #8
Relevance of Fund Directors In September 2003, New York Attorney General
Eliott Spitzer announced a widespread investigation of mutual funds
As of September 2004, 25 fund families were apparently involved in the market timing and late trading scandals Settlements reached $2 billion
The widespread nature of mutual fund scandals seem to question the effectiveness of fund governance
The board of directors may be an important internal governance force to monitor managers
April 20, 2023 Mutual Fund Managers and Directors Slide #9
New SEC Rules on Fund Governance (originally effective September 7, 2004;
currently stayed by the U.S. Court of Appeals) At least 75% of the directors must be independent
Over 80% currently conform to this requirement The board's chairman must be independent
More hotly contested by the industry The board measures (at least annually) the performance of
the board and its committees The independent directors meet at least quarterly in a
session with no interested directors present Independent directors are authorized to hire independent
employees and to retain advisers and experts necessary to carry out their duties
April 20, 2023 Mutual Fund Managers and Directors Slide #10
Role of Boards of Directors in Fund Performance
Our Conjecture: When the board is more effective, a fund performs better and the advisor is more likely to discipline managers for underperformance Directors negotiate fund fee contracts with fund advisors (Indirectly) help to select (and fire) fund managers, as well as to
incentivize managers Can argue for increased support for underperforming manager
(e.g., more analysts, co-managers) Prevent family cross-subsidization (a la Massa paper) at the
expense of their fund If so, what are the characteristics of effective boards?
April 20, 2023 Mutual Fund Managers and Directors Slide #11
Contributions of Our Study
We provide insight into issues of fund governance: Do independent directors improve the
efficiency of manager labor markets? Do they improve fund performance through
monitoring of fund manager and management company behavior?
April 20, 2023 Mutual Fund Managers and Directors Slide #12
Mutual Fund Manager Data Extensive panel dataset of fund managers, 1985
to 2002, compiled from: Morningstar (including M-S Librarian) Thomson/Wiesenberger CRSP (1992-2002) Various mutual fund publications during 1984-91
Mutual Fund Directory of Investment Dealers’ Digest Mutual Fund Profiles of S&P/Lipper (1987-91) Handbook for No-Load Fund Investors (1984-91) Mutual Fund Sourcebook of Morningstar (1984-91)
Archived fund filings from SEC’s Public Reference Room
April 20, 2023 Mutual Fund Managers and Directors Slide #13
Summary Statistics on Fundsand Fund Managers
Manager data is matched with stockholdings data from CDA/Spectrum and net returns/characteristics data from CRSP (see Wermers (2000) for description)
Limited to funds having an investment objective of AG, G, GI, I (actively managed, diversified domestic-equity funds)
April 20, 2023 Mutual Fund Managers and Directors Slide #14
CS Measure of Magellan Fund
-5
0
5
10
15
20
25
30
35
4019
77
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Year
CS
Mea
sure
(%/y
ear)
Peter Lynch’s Tenure
April 20, 2023 Mutual Fund Managers and Directors Slide #15
1985 1991 1997 2002 1985-2002
All Funds 324
(15%)
648
(3%)
1,594
(5%)
1,698
(10%)
2,689
(4%)Aggressive Growth 70
(14%)
169
(2%)
178
(3%)
276
(8%)
533
(3%)Growth Funds 165
(15%)
345
(4%)
1,129
(6%)
1,137
(10%)
2,084
(4%)Growth and Income
or Income89
(16%)
134
(2%)
287
(5%)
285
(10%)
561
(2%)
Counts of Funds/(Percentage With Missing Managers) (Table I)
April 20, 2023 Mutual Fund Managers and Directors Slide #16
Median Fund Manager Characteristics(Table II, Panel A)
Career Experience
(Years)
Career CS Track
Record (% per year)
Proportion of Funds
Experiencing Lead Manager Replacement
(%/year)
1985-1987 4.3 1.21 10.2
1988-1990 4.7 0.65 10.3
1991-1993 4.8 0.88 12.2
1994-1996 4.0 0.72 13.5
1997-1999 4.3 0.16 14.1
2000-2002 5.5 1.46 14.8
April 20, 2023 Mutual Fund Managers and Directors Slide #17
Reasons for Manager Replacement (Not in Paper)
Prior 3-Year CS Quintile N TNA Left the Sample Demotion Lateral Promotion
Highest 18 891 56.2% 11.5% 13.5% 13.5%
2 17 1220 59.5% 12.8% 15.2% 5.6%
3 19 712 60.6% 16.9% 12.9% 2.4%
4 23 620 62.4% 12.8% 12.0% 6.8%
Lowest 24 286 67.0% 9.1% 11.1% 7.6%
Average Fund Size ($millions), Segregated by Fund Manager
Characteristics(Table II, Panel B)
Career Track RecordAverage Career Track Record (%/year) 8.70 2.67 0.70 -1.18 -6.49 1.02
Average Career Experience (Years)
Top 20%
2nd 20%
3rd 20%
4th 20%
Bottom 20%
All Lead
Managers
Top 20%-Botto
m 20%
Career Experience
18.5 Top 20% 1,265 2,013 1,491 886 421 1,236 844***8.8 2nd 20% 1,227 723 602 530 308 688 919***5.4 3rd 20% 480 553 606 365 224 445 257**3.3 4th 20% 320 399 311 285 214 306 107
1.3Bottom 20% 234 283 286 202 128 229 106**
8.0All Lead Managers 761 860 699 468 268 617 493***
Top 20%-Bottom 20%
1031***
1730***
1205*** 684*** 293***
1007***April 20, 2023 Mutual Fund Managers and Directors Slide #18
April 20, 2023 Mutual Fund Managers and Directors Slide #19
Following-Year CS Portfolio Performance,Largest 20% of Funds
(Table III, Panel A)
Career Track Record
Average Career Track
Record (%/year) 6.88 3.03 1.42 0.17 -2.04 1.91
Average Career
Experience (Years)
Top 20%
2nd 20%
3rd 20%
4th 20%
Bottom 20%
All Funds
Top 20%-
Bottom 20%
Career Experience
24.3 Top 20% 1.87 1.85 1.25 0.46 0.12 1.13 1.75**13.2 2nd 20% 0.62 1.10 0.64 -0.52 0.01 0.39 0.60
8.5 3rd 20% -0.01 0.92 0.38 0.82 0.14 0.48 -0.155.6 4th 20% 0.26 1.08 1.04 1.40 1.42 1.03 -1.162.8 Bottom 20% -0.42 0.79 0.00 0.07 0.63 0.20 -1.05*
10.9 All Funds 0.48 1.18 0.66 0.46 0.46 0.65 0.02
Top 20%-Bottom 20%
2.28* 1.07
1.24** 0.39 -0.51 0.92*
April 20, 2023 Mutual Fund Managers and Directors Slide #20
Following-Year CS Portfolio Performance,Smallest 20% of Funds
(Table III, Panel C)
Career Track Record
Average Career Track
Record (%/year) 8.52 2.58 0.10 -2.26 -9.08 0.05
Average Career
Experience (Years)
Top 20%
2nd 20%
3rd 20%
4th 20%
Bottom 20%
All Funds
Top 20%-
Bottom 20%
Career Experience
19.4 Top 20% -0.42 1.09 0.07 -0.92 4.49 0.57 -4.91***8.6 2nd 20% 0.84 0.76 1.11 0.99 0.83 0.92 0.015.1 3rd 20% 4.40 2.38 1.51 1.24 0.56 2.03 3.84**3.2 4th 20% 0.89 2.01 2.21 2.33 0.97 1.65 -0.07
1.7Bottom 20% 0.94 0.64 0.66 1.14 0.17 0.67 0.76
7.5 All Funds 1.30 1.35 1.10 0.97 1.25 1.17 0.05
Top 20%-Bottom 20% -1.36 0.44 -0.59 -2.06** 4.31** -0.10
April 20, 2023 Mutual Fund Managers and Directors Slide #21
Dependent Variable: Fund Performance (Year t+1) (Table IV)
Portfolio Alpha (CS) Net Alpha + Expenses Net Alpha(%/year) (%/year) (%/year)
(1) (2) (3) (4) (5) (6)Constant 1.23* 1.14 3.84*** 4.14*** 1.73 1.97
1.87 1.70 3.09 3.21 1.49 1.65Log(TNA) -0.21** -0.22** -0.58*** -0.60*** -0.40** -0.42**
-2.67 -2.74 -3.77 -3.84 -2.78 -2.88
EXPER -0.029 -0.021 -0.11** -0.14**-
0.14***-
0.16***-0.89 -0.59 -2.28 -2.51 -2.97 -3.17
CST 0.18** 0.18** 0.081 0.090 0.11 0.122.21 2.19 0.74 0.81 1.02 1.07
Log(TNA)×EXPER 0.0093* 0.011** 0.019** 0.018**0.023*
** 0.021**1.90 2.38 2.42 2.29 3.04 2.90
Log(TNA)×CST -0.030** -0.031*0.00002
0 -0.0015 -0.0063 -0.0075-1.98 -1.98 0.00 -0.08 -0.32 -0.39
NUMFUNDS_ADVISOR×EXPER -0.0017 0.0063* 0.0055*
-1.06 1.93 1.85
NUMFUNDS_ADVISOR 0.030***0.041**
* 0.035** 0.00390.034**
* 0.00573.35 3.14 2.83 0.19 2.91 0.28
Avg. N 778 778 771 771 785 785Avg. Adj. R2 0.04 0.04 0.04 0.04 0.04 0.04
April 20, 2023 Mutual Fund Managers and Directors Slide #22
Director Data
We collect director data for 1995, 1999, and 2002 (Lipper provided 2002) Total number of directors for each fund Number of outside directors Whether board chair is insider or independent
April 20, 2023 Mutual Fund Managers and Directors Slide #23
Harris and Raviv (2005)Theory of Board Structures
For boards that are majority outsider (by regulation), additional outsiders only play an additional information-gathering role Too few outsiders means incentive for more
information collection Too many outsiders means each outsider has
increasing free-rider problem Optimum number of outsiders: benefits of collecting
incremental information equals costs (for each outside director)
April 20, 2023 Mutual Fund Managers and Directors Slide #24
Summary Statistics on Board Characteristics(Table VI)
Panel A: 1995 Board Characteristics
(1) All Funds
(N=1107)
(2) Management
Turnover (N=98)
(3) No Management
Turnover (N=1009)
p-Value for Difference
between (2) and (3)
Mea
nMedia
n Mea
nMedia
n MeanMedia
n t-Stat WilcoxonNUMDIR 7.6 7.0 8.5 8.0 7.6 7.0 0.00 0.00NUMINDEP 5.5 5.0 6.3 6.0 5.4 5.0 0.00 0.00NUMINSIDER 2.1 2.0 2.2 2.0 2.1 2.0 0.33 0.31
FRACINDEP0.71
4 0.7140.73
1 0.750 0.713 0.714 0.14 0.16
INSIDERCHAIR0.59
8 1.0000.58
2 1.000 0.600 1.000 0.73 0.77
INSIDERLEAD0.86
2 1.0000.86
7 1.000 0.861 1.000 0.87 0.92
INDEPCHAIR0.04
5 0.0000.04
1 0.000 0.046 0.000 0.83 0.94
UNITARY0.83
7 1.000 0.77
6 1.000 0.843 1.000 0.08 0.27
Panel C: 2002 Board Characteristics
(1) All Funds
(N=1443)
(2) Management
Turnover (N=139)
(3) No Management
Turnover (N=1304)
p-Value for Difference
between (2) and (3)
Mean Median Mean Median MeanMedia
n t-Stat WilcoxonNUMDIR 8.2 8.0 9.8 10.0 8.0 7.0 0.00 0.00NUMINDEP 6.2 6.0 7.5 8.0 6.1 6.0 0.00 0.00NUMINSIDER 2.0 2.0 2.3 2.0 1.9 2.0 0.00 0.00
FRACINDEP0.75
4 0.750 0.767 0.769 0.752 0.750 0.11 0.03
INSIDERCHAIR0.49
8 0.000 0.504 1.000 0.497 0.000 0.88 0.90
INSIDERLEAD0.73
8 1.000 0.612 1.000 0.752 1.000 0.00 0.01
INDEPCHAIR0.17
9 0.000 0.295 0.000 0.166 0.000 0.00 0.01
UNITARY0.84
5 1.000 0.885 1.000 0.840 1.000 0.17 0.39
Correlations Between Board Characteristics (1995, 1999, and 2002)
Panel D: Pearson Correlations of Board Characteristics Variables (Averaged Across Years 1995, 1999, and 2002)
NUMDI
RNUMINDE
PNUMINSIDE
R FRACINDEP INSIDERCHAIR INSIDERLEAD INDEPCHAIRUNITAR
YNUMDIR 1.00 NUMINDEP 0.94 1.00NUMINSIDER 0.62 0.31 1.00FRACINDEP 0.11 0.43 -0.67 1.00INSIDERCHAIR 0.09 0.03 0.18 -0.15 1.00INSIDERLEAD 0.00 -0.09 0.19 -0.29 0.54 1.00INDEPCHAIR 0.08 0.13 -0.08 0.20 -0.36 -0.64 1.00UNITARY -0.09 -0.12 0.02 -0.10 0.00 0.01 -0.05 1.00
April 20, 2023 Mutual Fund Managers and Directors Slide #25
April 20, 2023 Mutual Fund Managers and Directors Slide #26
Logit Regressions of Manager Replacement (Pooled Years 1995, 1999, and 2002, Table VII)
(1)Prior 3-yearα +expense<0 and manager
experience<10 years
(2)Prior 3-yearα +expense<0 and manager
experience<10 years
(3)Prior 3-yearα +expense<0 and manager
experience>=10 years
(4)Prior 3-yearα +expense<0 and manager
experience>=10 years
(5)Prior 3-yearα <0 and
manager experience<
10 years
(6)Prior 3-yearα <0 and
manager experience<
10 years
(7)Prior 3-yearα <0 and
manager experience>=
10 years
(8)Prior 3-yearα <0 and
manager experience>=1
0 years
Intercept -1.51*** -1.60*** -4.07*** -4.15*** -1.92*** -1.99*** -5.45*** -5.61***(-2.63) (-2.69) (-5.09) (-5.09) (-3.82) (-3.82) (-6.34) (-6.25)
NUMINDEP 0.02 0.01 0.17* 0.13 0.03 0.02 0.19** 0.15**(0.47) (0.19) (1.92) (1.45) (0.65) (0.40) (2.55) (2.04)
D75% 0.23 0.51 0.18 0.61(0.86) (1.11) (0.73) (1.41)
INSIDERLEAD -0.39 -0.35 -0.05 0.04 -0.28 -0.25 0.37 0.45(-1.49) (-1.33) (-0.08) (0.06) (-1.20) (-1.05) (0.62) (0.76)
UNITARY -0.57* -0.56* 0.23 0.18 -0.50* -0.49* 0.59(-1.94) (-1.88) (0.45) (0.37) (-1.88) (-1.83) (1.13)
Doutflow 0.81*** 0.80*** -0.13 -0.18 0.97*** 0.96*** 0.25 0.21(2.93) (2.85) (-0.35) (-0.50) (3.95) (3.86) (0.70) (0.60)
Log(TNA) -0.05 -0.05 0.07 0.08 -0.04 -0.04 0.07 0.07(-0.79) (-0.71) (0.68) (0.72) (-0.71) (-0.67) (0.74) (0.76)
NUMFUNDS_ADVISOR 0.01** 0.01** -0.01 -0.01
0.01*** 0.01***-0.004 -0.01
(2.47) (2.38) (-0.69) (-0.78) (2.90) (2.83) (0.65) (-0.62)DYEAR=1995 -0.02 -0.03* 1.06* 1.05* -0.11 -0.11 1.03* 1.04**
(-0.05) (-0.09) (1.95) (1.90) (-0.40) (-0.41) (1.95) (1.97)DYEAR=1999 -0.53* -0.55** 0.27 0.30 -0.42* -0.43* 0.54 0.56
(-1.92) (-2.00) (0.49) (0.61) (-1.74) (-1.78) (1.12) (1.18)Total Number 628 628 320 320 822 822 415 415Number with Replacement 91 91 30 30 112 112 34 34
MacFadden R2 0.07 0.07 0.05 0.05 0.07 0.07 0.05 0.06
Regressions of Fund Performance on Governance Variables (Table VIII)
Portfolio Performance (CS) (%/year)
Net Alpha + Expenses(%/year)
Net Alpha(%/year)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Intercept-
4.88***-
3.44***-
3.43***-
3.03*** 0.22-
2.17***
-2.02**
* -1.03 -1.89
-4.14**
*
-3.97**
*
-3.08**
*-3.50 -6.09 -6.03 -4.31 0.15 -3.45 -3.19 -1.30 -1.29 -6.73 -6.44 -3.93
Log(TNA) 0.18** 0.12 0.12 0.12 -0.054 -0.14 -0.17* -0.17* 0.066 -0.011 -0.040 -0.0462.32 1.58 1.53 1.49 -0.63 -1.55 -1.83 -1.91 0.79 -0.12 -0.45 -0.52
NUMINDEP 0.18** 0.18** 0.17**0.24**
* 0.16* 0.14*0.22**
* 0.14* 0.122.53 2.30 2.18 3.07 1.99 1.72 2.77 1.64 1.39
FRACINDEP 3.21 -2.53 -2.431.56 -1.20 -1.15
D75% -0.85* -0.60* -0.61*-
0.61*** -0.46-
1.35***
-1.43**
*
-1.45**
* -0.48
-1.31**
*
-1.39**
*
-1.41**
*-1.73 -1.76 -1.77 -1.80 -0.87 -3.64 -3.84 -3.90 -0.91 -3.53 -3.75 -3.80
INSIDERCHAIR -0.51* -0.59* -0.58* -0.56* -0.12 -0.15 -0.0310.001
4 -0.14 -0.16 -0.039 -0.010-1.63 -1.89 -1.83 -1.79 -0.34 -0.44 -0.09 0.00 -0.40 -0.49 -0.11 -0.03
UNITARY -0.40 -1.00** -0.91*-0.99 -2.05 -1.87
NUMFUNDS_ADVISOR 0.0023 0.0030
0.026***
0.028***
0.028***
0.029***
0.25 0.32 2.59 2.75 2.76 2.90
DYEAR=1995 2.48*** 2.48*** 2.49*** 2.47*** 2.55*** 2.67***2.71**
*2.67**
*2.74**
*2.85**
*2.89**
*2.85**
*7.65 7.67 7.67 7.61 5.52 5.78 5.87 5.78 5.93 6.17 6.27 6.18
DYEAR=1999 0.64* 0.72* 0.72* 0.72* 3.36*** 3.54***3.54**
*3.54**
*3.49**
*3.65**
*3.65**
*3.65**
*1.63 1.84 1.84 1.85 9.10 9.54 9.54 9.56 9.48 9.88 9.87 9.89
N 3,273 3,273 3,273 3,273 3,273 3,273 3,273 3,273 3,273 3,273 3,273 3,273Adj. R2 0.01 0.01 0.01 0.01 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.04
April 20, 2023 Mutual Fund Managers and Directors Slide #27
April 20, 2023 Mutual Fund Managers and Directors Slide #28
Summary of Director Results
Underperforming managers are more likely to be replaced with boards having more independent directors When manager has at least 10 years experience Flows and management company only effective for replacing
managers with less than 10 years experience
Funds with larger numbers of independent directors tend to perform better Over 75% tends to decrease performance
Insiders better monitor “hidden actions” Only weak evidence that inside chair impacts performance