Title

Economies of Scale or Agency Concerns? Evidence from Side-By-Side Managed Mutual Funds

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Abstract

We examine the phenomenon of multiple equity mutual funds that are managed by the same individual or group. These managers (SBS) represent about one fourth of all equity fund managers, and the funds they control account for nearly one half of all U.S. equity fund assets. Because we can observe their investment allocations, this provides an ideal laboratory to examine agency issues, and we provide empirical evidence on this as well as fund performance and risk-taking activity. We find significant overlap between SBS managers’ portfolios, which has implications for the literature on optimal fund size. While we find no evidence of performance differences, we do find that SBS managed funds exhibit greater risk than their non-SBS counterparts, and also that SBS managers diversify internally by spreading risky positions across the funds they manage, indicating possible significant agency conflicts. SBS funds have lower sales loads and are similar in size to non-SBS funds. Finally, we find that transitioning existing single managers to SBS management is not associated with performance, suggesting SBS mutual fund management is not used to compensate stars.

Disciplines

Finance and Financial Management

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