Three essays on mutual funds
Date of Issue2014
College of Business (Nanyang Business School)
In essay one, for an actively managed equity mutual fund, style dispersion describes how widely fund stockholdings are dispersed along size, value, and momentum dimensions. A simple benefit-cost analysis suggests that style dispersion can reflect a fund manager's investment ability and predict fund performance. Our empirical analysis confirms this. We have two major findings. First, style dispersion, especially that along size dimension, is significantly positively related with fund performance. Second, a high-size-dispersion fund manager exhibits significantly better stock selection skill than a low-size-dispersion fund manager does, especially when investing in stocks with different size characteristics from the average fund size style. We also conduct various robustness tests to show that size dispersion is distinct from all existing predictors of fund performance. Essay two shows that family-level M&As have a negative impact on mutual fund performance. Specifically, in family-level M&As, the acquiring families keep most of the acquired funds intact, and merge the rest with a few incumbent funds. The intact acquired funds have a performance deterioration for up to 20 months. The intact incumbent funds have a performance deterioration, which is particularly pronounced in complete acquisitions, for up to 12 months. We also rule out some alternative explanations for the performance change. Finally, we show that consistent with agency theory, family-level M&As are likely to be motivated by family management's own incentives. In essay three, using equity mutual fund data, previous studies show that team-managed funds underperform solo-managed funds, suggesting that a team is a poor incentive mechanism. In this article, we take a deeper look into the composition of mutual fund management teams. Our major finding is that not all team-managed funds underperform. Only those with poor accountability of fund managers for fund performance do. A plausible explanation for this is that poor accountability disincentivizes fund managers from acquiring information. Unlike previous studies, we conclude that a team per se does not represent a poor incentive mechanism. Accountability of team members is more relevant in providing incentives.