Mutual Fund Performance and Manager Assets: The Negative Effect of Outside Holdings

Abstract

We explore the relation between fund performance and the assets managed by the fund’s managers that are outside the fund. Controlling for fund size, we find a negative relation between performance and the size of fund managers’ outside holdings, the number of other funds managed by a fund’s managers, and the number of distinct fund categories managed by a fund’s managers. This effect is driven by holdings that do not overlap with those held within the fund, and the effect’s economic magnitude, while less than that of fund size, is comparable to that of fund family size and twice that of turnover. Endogeneity is addressed using fund mergers and recursive demeaning. Results suggest that manager responsibilities outside a fund significantly impact performance and that limited attention plays a role.

Keywords: mutual fund managers; diseconomies of scale; outside holdings; attention; price impact.

JEL Classification: G23