Managers beyond borders: side-by-side management in mutual funds and pension funds

Abstract

Firms of collective investment industries, such as mutual and pension funds, are knowledge-intensive organizations that share managers between their multi-businesses to transfer the know-how of their employees and take advantage of the firm-specific human capital. This paper analyses the determinants and consequences of the simultaneous management (also called side-by-side or SBS management) of mutual and pension funds. In a sample of UK domestic equity mutual and pension funds, we find that managers are more likely to become SBS managers whether they belong to larger firms, have prior experience handling multiple funds, possess higher tenure, are female, and run smaller funds. Furthermore, SBS managers outperform their peers, showing the value of sharing human resources among diversified firms. Our results also show that holding similar portfolios between the funds of a manager may facilitate the multi-fund management. Top performers (SBS and non-SBS) present higher portfolio similarities than bottom performers, and higher fund similarities allow top managers to attract flows between their funds. However, top non-SBS managers erode performance due to higher portfolio similarities.

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Notes

  1. 1.

    Besides an SBS management at manager and firm levels, the SBS management may only be developed at firm level; that is, firms market in two investment industries and do not share managers between them.

  2. 2.

    Pension funds are long-term investments and participants cannot disinvest until retirement; however, participants may transfer their savings to other pension funds, under the fund conditions.

  3. 3.

    Some countries establish maximum pension-fund fees to ensure retirement income (Tapia and Yermo 2008).

  4. 4.

    Management fees are charged on the fund assets under management.

  5. 5.

    UK mutual funds are under multiple legal rules. The main legislation is: Financial Services and Markets Act 2000; Building Societies (Funding) and Mutual Societies (Transfers) Act 2007; and The Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019. With regard to UK pension funds, the main rules are, Pensions Act 2014, The Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010, and The Occupational Pension Schemes (Charges and Governance) Regulations 2015.

  6. 6.

    According to the legal form, there are two types of pension funds: occupational and personal funds. Occupational funds are those promoted by employers for the benefit of employees, and personal funds are those formed by voluntary savings of individuals (OECD 2005). Our sample includes both types; however, our data do not allow us to differentiate between occupational and personal pension funds because Morningstar Direct database does not provide information about this characteristic.

  7. 7.

    The funds analysed have at least 75% of their holdings invested in equity.

  8. 8.

    Morningstar Direct is a global leading database of fund information, supplying data on more than 500,000 investment offerings, including mutual funds, pension funds, hedge funds, ETFs, and similar vehicles, historical portfolio holdings, indexes, and real-timing pricing, among others (https://www.morningstar.com/products/direct). This database contains complete samples of funds across the world, and is commonly used in specialised literature on funds (see among many others: Adams et al. 2012, 2018; Cici and Palacios 2015; Cici et al. 2018; Galagedera et al. 2018). Although Morningstar Direct is considered free of survivorship bias (Constantinides et al. 2013), and no previous works point out data limitation, Morningstar Direct website points out that this database provides “access to nearly every investment universe”. Hence, our data might suffer a completeness bias if Morningstar Direct does not cover all universes of UK mutual and pension funds.

  9. 9.

    All factor data are obtained from the Xfi Centre for Finance and Investment, University of Exeter: http://business-school.exeter.ac.uk/research/areas/centres/xfi/research/famafrench/disclaimer/.

  10. 10.

    Percentage fund flows are obtained as: \(Flows_{it} = (TNA_{it} - TNA_{it - 1} * (1 + R_{it} ))/TNA_{it - 1}\), where TNAit are the Total Net Assets of fund i at month t, and Rit is the return of fund i at month t. Additionally, flows are winsorized at the bottom and top 1% level of the distribution to ensure that extreme values do not drive our results.

  11. 11.

    Our sample is formed by 340 non-SBS managers running one fund over our study period. The remaining non-SBS managers handle several funds in some periods and one fund in other periods. Although SBS managers run several funds, we note that some managers are SBS managers for some time and non-SBS managers in other periods.

  12. 12.

    Regulation only requires reporting quarterly holdings. Although a few funds report higher frequency holdings, these are uneven and with diverse time basis.

  13. 13.

    These probabilities are obtained from the odds ratio of the assets and fund-age coefficients; that is, e−0.2803 − 1 = −0.2444 and e−0.0987 − 1 = −0.094.

  14. 14.

    The control-variable results are not displayed and are available upon request.

  15. 15.

    The differences with regard to column (5) of panel A are: the Nfunds by non-SBS manager coefficient becomes significantly negative in quintiles 1-3, showing that these pension-fund managers present limited skills to handle multiple funds. We also find negative firm-assets and fund-age influence and non-significant tenure in quintile 2, lower performance in females and non-significant firm-assets and tenure in quintile 4, and non-significant firm assets and negative fund-age influence in quintile 5.

  16. 16.

    The non-SBS manager samples are more limited because we exclude managers handling one fund. The top quintile of non-SBS managers was formed by 83 managers, and the bottom quintile of non-SBS managers was formed by 84 managers; therefore, over 69% of top non-SBS managers run one fund and 11.9% of bottom non-SBS managers run one fund.

  17. 17.

    These results are available upon request.

  18. 18.

    The remaining results are available upon request.

  19. 19.

    These results are available upon request.

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Correspondence to Mercedes Alda.

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Appendix

Appendix

See Table 8.

Table 8 Main results of the externality estimation process

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Alda, M. Managers beyond borders: side-by-side management in mutual funds and pension funds. Rev Manag Sci 15, 399–436 (2021). https://doi.org/10.1007/s11846-019-00345-4

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Keywords

  • Firm
  • Manager
  • Mutual fund
  • Pension fund
  • Side-by-side management

JEL Classification

  • G10
  • G23