«Managerial Multitasking in the Mutual Fund Industry V. Agarwal • L. Ma • K. Mullally Managerial Multitasking in the Mutual Fund Industry Vikas ...»
CFR Working Paper NO. 13-10
Managerial Multitasking in the
Mutual Fund Industry
V. Agarwal • L. Ma • K. Mullally
Managerial Multitasking in the Mutual Fund Industry
Vikas Agarwal Linlin Ma Kevin Mullally
Vikas Agarwal is from Georgia State University, J. Mack Robinson College of Business, 35 Broad Street, Suite 1234, Atlanta GA 30303, USA. Email: email@example.com. Tel: +1-404-413-7326. Fax: +1-404-413-7312. Vikas Agarwal is also a Research Fellow at the Centre for Financial Research (CFR), University of Cologne. Linlin Ma is from D’Amore-McKim School of Business, Northeastern University, 360 Huntington Avenue, Boston MA 02115, USA. Email: firstname.lastname@example.org. Tel: +1-617-373-4569. Kevin Mullally is from Georgia State University, J. Mack
Robinson College of Business, 35 Broad Street, Suite 1229, Atlanta GA 30303. Email: email@example.com. Tel:
+1-404-413-7318. We are grateful to the following for their comments: Jonathan Berk, Sudheer Chava, Gjergji Cici, Chris Clifford, Naveen Daniel, Nishant Dass, Gerald Gay, Simon Gervais, Lixin Huang, Narayanan Jayaraman, Wei Jiang, Bradford Jordan, Jayant Kale, Jerchern Lin, Pedro Matos, Felix Meschke, Jeffrey Pontiff, Veronika Krepely Pool, David Rakowski, Jonathan Reuter, Chip Ryan, Mila Getmansky Sherman, Marta Szymanowska, Qinghai Wang, Lei Wedge, Russ Wermers and seminar and conference participants at the AFA 2011 Meetings, Georgia Institute of Technology, University of Kentucky, the 5th Conference on Professional Asset Management, the 5th Singapore International Conference, and the FMA 2011 Meetings. This paper won the Best Paper Award in Investments sponsored by the AAII at the FMA 2011 Meetings. We are thankful to Rong Shao for excellent research assistance, and Melissa Pugeda and Steven Arnold of Morningstar for assistance with the data. We are responsible for all errors.
Managerial Multitasking in the Mutual Fund Industry Abstract We examine the determinants and consequences of mutual fund managers simultaneously managing multiple funds. Well-performing managers multitask by taking over poorly performing funds or launching new funds. Subsequent to multitasking, funds run by managers prior to multitasking (i.e., incumbent funds) experience performance deterioration while the performance of the acquired funds improves. Multitasking increases the assets of fund companies but results in a wealth transfer from shareholders of the incumbent funds to those of the funds the managers take over. Multitasking arrangements are terminated when investors recognize the associated agency problem and withdraw their capital from the incumbent funds.
Keywords: Multitasking, Fund Performance, Fund Flows, Agency Problems JEL Classification: G10, G20, G23
For example, the Fidelity Magellan Fund was the only fund run by their star manager, Peter Lynch. In reality, fund companies frequently assign multiple funds to the same portfolio manager. For instance, Will Danoff, manager of Fidelity Contrafund since 1990, also began managing Fidelity New Insights Fund in 2003. Moreover, 48% of mutual fund managers managed multiple funds simultaneously (i.e., multitask) and these managers controlled about 62% of the total assets in the industry during our sample period of 1980 to 2012. Despite being a widely prevalent practice, there has been little academic research on the subject of managerial multitasking in the mutual fund industry (Yadav, 2011; and Choi, Kahraman, and Mukherjee, 2014 being two exceptions). We attempt to fill this gap in the literature by examining the determinants and consequences of the multitasking phenomenon in the mutual fund industry.
We identify a sample of managers of U.S. open-end equity mutual funds that switch from single-tasking (i.e., managing one fund, which we refer to as incumbent) to multitasking (i.e., managing multiple funds) by either taking over existing funds within fund companies (which we refer to as acquired) or by launching new funds. 1 We refer to the acquired and new funds together as new-task funds. We document several findings that shed light on the economics of multitasking.
We find that managers who switch to multitasking exhibit superior past performance in the incumbent funds prior to the switch. Moreover, these managers multitask either by taking over other funds in the fund companies that are poorly performing or by launching new funds.
We offer three explanations for these findings. First, well-performing managers of incumbent
1 We borrow the terms, incumbent and acquired, from the mergers and acquisitions literature although our paper is not about mutual fund mergers, which have been studied by Jayaraman, Khorana, and Nelling (2002).
funds and new funds. Second, multitasking mechanism can help fund companies to turn around poorly performing funds, whose presence can adversely affect companies’ reputation. Lastly, since multitasking arrangement increases the manager’s span of control, mutual fund companies can use it to retain their good managers and to replace their bad managers, thereby maximizing the economic surplus generated through their monitoring role.2 We next examine the implications of managerial multitasking for fund performance, for which we have three hypotheses. First, managers are likely to be more distracted when running multiple funds simultaneously. These distractions can negatively impact managers’ performance.
This distraction hypothesis predicts that both the performance of the incumbent and the acquired funds suffer when managers multitask. Second, multitasking managers can divert their attention and effort from the existing funds to the new task. This effort diversion hypothesis predicts performance deterioration for the incumbent funds but performance improvement for the acquired funds. Third, multitasking managers can exploit synergistic benefits associated with learning while conducting investment research for multiple funds. 3 This synergy creation hypothesis predicts that performance of both the incumbent and acquired funds improve after the managers’ switch to multitasking.
To test these hypotheses, we compare the performance of the incumbent funds and the acquired funds before and after their managers’ switch to multitasking. We find that there is a striking decline in the risk-adjusted performance of the incumbent funds over the 12-month period subsequent to the switch – a decline of 0.13, 1.77%, and 1.23% in the annualized Sharpe
2 Gervais, Lynch, and Musto (2005) theoretically model mutual fund companies as delegated monitors of money managers, who can credibly convey manager quality and generate value through their firing and retention decisions.
3 This notion is similar to cross-learning documented in the context of firms offering hedge funds and funds of hedge funds simultaneously, as studied by Agarwal, Lu, and Ray (2015).
contrast, there is an improvement in the performance of the acquired funds: 0.21, 1.91%, and 2.89% using the annualized Sharpe ratio, four-factor alpha and benchmark-adjusted alpha, respectively. These changes in the three performance measures are economically significant since the average values for the incumbent funds prior to multitasking are 0.84, 1.39%, and 1.68%, while the corresponding values for the acquired funds are 0.46, ‒2.15%, and ‒1.93%. We interpret these results being consistent with the effort diversion hypothesis, and not in favor of either the distraction or the synergy creation hypothesis.
An obvious concern is that the above results may be driven by mean reversion in fund performance and/or decreasing returns to scale. To allay such concerns, we use propensity score matching to construct samples of control funds that are similar to our treated groups of incumbent and acquired funds but whose managers remain single-tasking. That is, the difference between the two groups allows us to capture the treatment effect of multitasking. We continue to find performance decline and improvement in the incumbent and acquired funds, respectively, even after taking into account the changes in performance of the respective matched control funds. In fact, unlike our treated samples of incumbent and acquired funds, the matched control samples show virtually no change in performance. Together, these findings suggest that mean reversion in fund performance and decreasing returns to scale do not entirely explain our results related to the effect of multitasking on fund performance.
To further corroborate the effort diversion hypothesis, we examine if the exertion of greater effort in the new-task fund is associated with more pronounced deterioration in the performance of the manager’s incumbent fund. Since it is challenging to observe and measure effort, we use three proxies for effort in the new task that include managing a new fund versus an
Morningstar style index.4 Each of these proxies attempts to capture the intensity of multitasking managers’ active involvement in the new-task funds. Consistent with our effort diversion hypothesis, we find that the incumbent funds’ performance suffers more when their managers launch a new fund and manage funds with greater turnover ratio and larger style deviation.
Next, we examine the economic incentives of mutual fund companies to engage in these multitasking arrangements by analyzing their effect on investor flows. We compare the net dollar flows into the incumbent and acquired funds before and after their managers’ switch to multitasking. We find that incumbent funds do not display a significant change in investor flows while acquired funds are rewarded with greater investor flows over the 12-month period subsequent to the switch. Further, new funds launched by multitasking managers attract more investor flows compared to the ones launched by single-tasking managers. These findings are consistent with the aforementioned positive spillover effect of multitasking on investor flows that allows mutual fund companies to increase their assets. Finally, in well-functioning financial markets with rational investors, fund companies should terminate these multitasking arrangements if investors withdraw their capital from the poorly performing incumbent funds.
We find that this is indeed the case.
Taken together, our findings uncover an important and hitherto unexplored manifestation of potential agency problems in the form of managerial multitasking in the mutual fund industry.
By assigning multiple funds to the same portfolio manager, fund companies benefit from managerial multitasking by increasing their assets, turning around their poorly performing funds,
4 The deviation from the style index is similar to the active share measure proposed by Cremers and Petajisto (2009) for mutual funds and strategy distinctiveness measure proposed by Sun, Wang, and Zheng (2012) for hedge funds.
the costs of poor performance due to managers’ multitasking. We show that these costs largely accrue to investors in the short run as fund performance improves after value-destroying multitasking arrangements are discontinued. Our work thus contributes to the large literature on the agency problems in the delegated asset management industry.5 In addition, our paper complements the growing literature studying how fund performance relates to different organizational structures such as team management (e.g., Bliss, Potter, and Schwarz, 2008; Massa, Reuter, and Zitzewitz, 2010; Baer, Kempf, and Ruenzi, 2011;
and Patel and Sarkissian, 2014), side-by-side management (e.g., Cici, Gibson, and Moussawi, 2010; Nohel, Wang, and Zheng, 2010; and Deuskar et al., 2011), and outsourcing arrangement (e.g., Chen, Hong, and Kubik, 2013) in the mutual fund industry. Finally, our paper relates to the corporate finance literature that studies whether firms with directors serving multiple boards are associated with weak corporate governance (e.g., Ferris, Jagannathan, and Pritchard, 2003; and Fich and Shivdasani, 2006).
The rest of our paper is organized as follows. Section I describes the data, sample selection, and construction of key variables. Section II examines the characteristics of funds associated with multitasking. Section III studies the performance implications of managerial multitasking. Section IV discusses the economic incentives of the fund companies to engage in
5 This literature includes the window-dressing behavior among portfolio managers (e.g., Lakonishok et al., 1991;
He, Ng, and Wang, 2004; Ng and Wang, 2004; Meier and Schaumburg, 2006;, and Agarwal, Gay, and Ling, 2014), strategic risk-shifting motivated by agency issues (e.g., Brown, Harlow, and Starks, 1996; Chevalier and Ellison, 1997; Kempf and Ruenzi, 2008; Kempf, Ruenzi, and Thiele, 2009; Hu et al., 2011; Huang, Sialm, and Zhang, 2011;
and Schwarz, 2012), conflict of interests arising from offering multiple products (e.g., Gaspar, Massa, and Matos, 2006; Chen and Chen, 2009; Cici, Gibson, and Moussawi, 2010; Bhattacharya, Lee, and Pool, 2013; and Sandhya,
2012) and incentive misalignment due to business ties (e.g., Davis and Kim, 2007; Cohen and Schmidt, 2009; and Ashraf, Jayaraman, and Ryan 2012).