Managerial Sharing, Mutual Fund Connections, and Performance

• Author: Lorenzo Casavecchia,Cathline Augustiani,Jack Gray
• DOI: http://doi.org/10.1111/irfi.12054
• Published date: 01 September 2015
• Date: 01 September 2015

Managerial Sharing, Mutual Fund

Connections, and Performance*

CATHLINE AUGUSTIANI†,LORENZO CASAVECCHIA‡AND JACK GRAY§

†GMO, Sydney, NSW, Australia

‡Finance Discipline Group, University of Technology Sydney, Sydney, NSW,

Australia and

§Paul Woolley Centre for the Study of Capital Market Dysfunctionality, University

of Technology Sydney, Sydney, NSW, Australia

ABSTRACT

In this study, we examine the effect of mutual fund connections, through

managerial sharing, on performance and stock holding commonalities. Our

analysis of return correlations and portfolio holdings indicates that more

interconnected funds tend to buy and sell similar stocks, hence increasing

the similarity of portfolio holdings and undermining the distinctiveness of

their investment strategy. Our results also indicate that highly connected

funds significantly underperform weakly connected funds by about 1.4% on

a yearly risk-adjusted basis. We show that fund family performance is unaf-

fected by the intensity of fund connections, and that greater fund connec-

tions could significantly enhance family-level profit margins.

JEL classification: G11; G12; G23

I. INTRODUCTION

Recent media coverage has highlighted a significant trend by large mutual fund

families such as Fidelity, Federated Investors, Eaton Vance, and Invesco to move

away from single-manager funds toward more cohesive and interconnected

funds where fund managers simultaneously comanage other funds in a family.1

For instance, Figure 1 provides an illustration of the varying degree of intra-

family managerial connections across different funds offered by Morgan

Stanley, with bigger nodes identifying more connected (or central) funds in the

family network. On the one hand, intensive connections among funds via

managerial sharing could foster innovation and have a positive impact on fund

* We would like to thank Adrian Lee, Marco Navone, Nahid Rahman, Susan Thorp, and two

anonymous reviewers for helpful comments. Casavecchia gratefully acknowledges the financial

support received from the Finance Discipline Group and the Quantitative Finance Research Centre

at the University of Technology Sydney.We acknowledge the technical support provided by Analytic

Technologies and the UTS FEIT High-Performance Parallel Computing Linux Clusters for the use of

their supercomputers. The opinion and analysis presented herein are those of the authors and do not

represent the views of GMO.

1 http://www.reuters.com/article/2011/12/02/funds-stars-idUSN1E7AR1JV20111202.

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International Review of Finance, 15:3, 2015: pp. 427–455

DOI: 10.1111/irfi.12054

© 2015 International Review of Finance Ltd. 2015

Figure 1 The Web of Mutual Fund Connections: The Case of Morgan Stanley.

In this figure, we plot as an illustrative example the web of social direct and indirect connections across all 95 equity mutual

funds (with Thomson Reuters investment objective codes and excluding specialty and international funds) offered by Morgan

Stanley in 2004 using the UCINET Network Visualization software. This social network illustrates the intricate structure of the

intra-family connections between mutual funds (nodes) whose managers (ties) comanage simultaneously 1 or more other funds

(i.e., managerial sharing) in the same management company. Each node is represented by a circle of different size depending on

the fund’s degree of direct connections (FDC), with bigger (smaller) nodes indentifying more central (peripheral) funds in the

information flow within the fund family. For instance, fund F92 (strongly connected) is characterized by the highest degree of

direct connections as indicated by the large size of the node while fund F55 (weakly connected) shares only three connections

with other funds in the family.

International Review of Finance

428 © 2015 International Review of Finance Ltd. 2015