Limited attention and portfolio choice: The impact of attention allocation on mutual fund performance

Abstract

This study proposes that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set. Motivated by existing models of optimal portfolio choice and rational inattention, we posit that the efficiency of attention allocation increases when a manager chooses larger (smaller) active positions in assets that need more (less) information acquisition effort to resolve uncertainty about future payoffs. We show that the efficiency of attention allocation has a significantly positive impact on future fund performance. Efficient attention allocation has a lesser impact on performance as the total demands on a manager's limited attention increase.

Institutional trading and information processing: Evidence from complicated firms and easy‐to‐analyze firms

“…Skilled institutions simplify their portfolios to reduce the cost of processing information about the stocks in their portfolios. This study complements recent research by Gupta‐Mukherjee and Pareek (2020) and Kacperczyk et al (2016) that finds that attention scarcity affects the portfolio selections of financial institution managers. Finally, this study shows that portfolio conglomerate concentration is an additional portfolio characteristic that can proxy for institutional investor skill.…”

“…Potentially, skilled financial institutions intentionally maintain fewer conglomerate firms in their portfolios as a way of reducing the cost of information gathering and processing. Gupta‐Mukherjee and Pareek (2020) and Huang and Liu (2007) find that the high cost of information acquisition affects investors’ portfolio selections. Therefore, it is possible that skilled managers at financial institutions rationally reduce the number of complicated firms in their portfolios to efficiently employ information‐processing efforts, and institutions with skilled managers hold simple portfolios, namely, those containing a low concentration of conglomerate firms and a high concentration of stand‐alone firms.…”

“…Kacperczyk et al (2016) find that mutual fund managers intentionally shift their attention from aggregate information to idiosyncratic information during different states of the business cycle. According to Gupta‐Mukherjee and Pareek (2020), mutual fund managers allocate greater information‐processing effort to stocks in which they have larger active positions. Huang and Liu (2007) find that information‐processing costs induce rational investors to ignore important economic news, even if it affects their investment performance.…”

Are institutional investors with multiple blockholdings effective monitors?

“…CEOs are also more likely to receive opportunistically timed equity grants and less likely to be fired after bad performance. 3 Similarly, Gupta-Mukherjee and Pareek (2012) show that fund performance increases when fund managers allocate more attention toward the stocks with the highest attention requirements, suggesting that efficient attention allocation improves fund performance. These findings suggest that institutional investors with multiple blockholdings face time constraints in monitoring their portfolio firms and are thus less likely to perform effective monitoring functions.…”

How do Personal Real Estate Transactions Affect Productivity and Risk Taking? Evidence from Professional Asset Managers

“…77Agarwal and Ma (2012) document a similar phenomenon of managerial multitasking in the mutual fund industry, and describe it as “effort diversion.” In the hedge fund industry, distraction from noncore activities is documented by Boyson (2009), Agarwal, Lu and Ray (2016) and Lu, Ray and Teo (2016). In a mutual fund context, Gupta‐Mukherjee and Pareek (2016) find that the performance of managers is linked to how efficiently they allocate attention across assets in their investment set.…”