Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers and Boards of Directors

Bill DingRuss Wermers

Discussion by Mathijs van Dijk

What this paper does• Study of the relation between mutual fund

performance and mutual fund governance• Strengths:

– Fascinating topic, underexplored, relevant for regulators– Great data on fund manager careers– Great data on mutual fund boards (independence)– Careful analysis, new results– Nuanced story

Main analyses1. Regressions of fund performance on fund size + lead-

manager experience / track record + interactions– Result: “higher managerial experience positively predicts

future (…) performance of larger funds” – Interpretation: Good governance: “experienced managers

who are promoted to larger funds outperform their peers”– Result: “more experienced managers of smaller funds

underperform their benchmarks”– Interpretation: Bad governance: “they have become

entrenched by an ineffective governance system”

Main analyses – continued 2. Regressions of manager replacement on board

characteristics + past fund flows– Result: for “negative alpha managers with at least ten year of

experience,” only independent directors (not flows) matter– Interpretation: Bad governance: “flows are an ineffective

disciplinary force when managers are experienced – indicating that entrenchment is present among portfolio managers with a lot of experience”

3. Regressions of fund performance on board characteristics– Result: “additional [independent] director increases pre-

expense performance by (…) 14 basis points per year”– Interpretation: “strong role for outside directors in improving

fund performance and minimizing manager entrenchment”

Comment 1: What is good governance?• What do you mean by “effective governance” in the

mutual fund industry?• This paper: perspective of investors in mutual funds:

– Investment performance of fund is taken as key indicator of good governance

– But investors are not the principals! The principals are the owners of mutual fund companies

– Fund owners are interested in cash flows / valuation, which may be more related to fund size than fund performance• We know flows are related to performance, but not 1-on-1

• Can you look at listed mutual fund companies?• Do directors care about fund flows or performance?

– Interact directors with flows / performance in analysis 2.

Comment 2: Trust in skill measures?• Measuring managerial skill based on the track record

of the manager is notoriously difficult– Still academic debate about aggregate level– Very noisy point estimates at manager level

• So should boards really be expected to act based on point estimates of performance measures?

• Suggestions:– Can you measure persistence at the manager level?– Take variability in performance track record into account– Use t-statistics of performance measures

• Plus: track record may be partly driven by inheritance from previous managers– Entrenchment conclusion seems premature to me

Comment 3: Too much going on!• Paper presents a plethora of different analyses based

on various performance measures, (in)dependent variables, (non-linear) interactions, subsamples

• Overall, I view the current paper as too meandering– Variety of conclusions based on different analyses– Some require leap of faith– No real punchline

Other comments• Do staggered boards matter?• Can you measure other aspects of fund governance besides

board characteristics (e.g., ownership structure, compensation, market for corporate control, competition)?

• Can good managers be hired to manage funds in distress – and hence in part inherit poor performance?

• Is difference between 14 and 7bp per year on p. 5 significant? (statistically/economically)

• Since you do not use actual data on demotions/promotions, I find your language sometimes quite loose (e.g., on p. 20) – Can you examine actual demotions/promotions to smaller/larger funds

within the same company?• Should track record be based on entire career?• The stated implication of Hypothesis 1 not obvious to me (p. 26)• Shouldn’t you have fund fixed effects in Table VIII?

Final thoughts• Very interesting and relevant paper

• Some room for improvement in:– Defining good governance– Acknowledging challenge of measuring skill– Streamlining analyses and results