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Compensation in Mutual Fund Management

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Commonwealth Hall C
Hosted By: American Finance Association
  • Chair: Clemens Sialm, University of Texas-Austin and NBER

Are Mutual Fund Managers Paid For Investment Skill?

Markus Ibert
Stockholm School of Economics
Ron Kaniel
University of Rochester
Stijn Van Nieuwerburgh
New York University
Roine Vestman
Stockholm University


Compensation of mutual fund managers is paramount to understanding agency frictions in
asset delegation. We collect a unique registry-based dataset on the compensation of Swedish mutual
fund managers. We find a concave relationship between pay and revenue, in contrast to how
investors compensate the fund company (firm). We also find a surprisingly weak sensitivity of pay
to performance, even after accounting for the indirect effects of performance on revenue.
Firm-level fixed effects, revenues, and profits add substantial explanatory power for compensation
to manager-level revenue and performance.

What Does Compensation of Portfolio Managers Tell Us About Mutual Fund Industry? Evidence From Israeli Tax Records

Galit Ben Naim
Ministry of Finance-Israel
Stanislav Sokolinski
Rutgers University


We study the determinants of compensation in the mutual fund industry using Israeli administrative
tax records over 2006-2014. The portfolio manager compensation is influenced by fund flows
driven by past raw returns. Managers are thus paid equally for fund superior performance as well
as for returns that can be traced to the fund’s passive benchmark, with a percentage point increase
in either passive or active returns associated with an approximately 1% increase in manager compensation.
To explain why mutual fund companies compensate their managers for fund flows and do
not “filter out” the passive benchmark component, we present a simple model of compensation in the
money management sector. In the model, investors prefer to invest with financial intermediaries they
are more familiar with, and manager compensation is determined by the sharing of rents that accrue
to intermediaries for offering access to risky returns. The key implication of the model is that investor
familiarity with financial intermediaries magnifies the sensitivity of manager compensation and fund
flows to past performance. Using proxies for investor familiarity we confirm the predictions of the model. Our empirical results imply that investors’ inability to distinguish between passive and active returns and their preference to invest with familiar intermediaries are important drivers of managerial compensation. The absence of strong incentives to generate superior performance may explain why the average actively managed mutual fund underperforms.

Mutual Fund Risk-shifting and Management Contracts

Junghoon Lee
Tulane University
Charles Trzcinka
Indiana University
Shyam Sunder Venkatesan
Tulane University


We study risk-shifting linked to the performance contracts of portfolio managers. Our theory predicts that mutual fund managers with asymmetric performance contracts and mid-year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk-shifting only for managers with performance contracts. Managers without performance contracts do not shift risk. Deviation from the benchmark dominates the incentives from the flow-performance relation, suggesting that risk-shifting is motivated more by management contracts than by a tournament to capture flows.

On the Role of Human Capital in Investment Management

Leonard Kostovetsky
Boston College
Alberto Manconi
Bocconi University


Asset management companies in the United States employ several hundred thousand people in advisory, portfolio management, and research roles, yet academic research suggests their investments, on average, underperform passive benchmarks net of fees. Using a new dataset on over 10,000 registered investment advisors (RIAs), we analyze which clienteles, asset classes, and strategies require more human capital, as well as the value that human capital adds to investment management. We find that while more human capital is not associated with better performance (controlling for assets under management), having more advisory personnel helps attract more assets, justifying their salaries from the point of view of the firm. Furthermore, larger teams actually behave more like closet-indexers, holding more diversified portfolios with lower tracking error. Our findings suggest that some active management companies realize their ability, or lack thereof, to generate alpha, and use their employees in order to keep and attract clients.
Harrison Hong
Columbia University
Mariassunta Giannetti
Stockholm School of Economics
Susan Christoffersen
University of Toronto
Eric Zitzewitz
Dartmouth College
JEL Classifications
  • G1 - General Financial Markets