Tailored versus Mass Produced: Portfolio Managers Concurrently Managing Separately Managed Accounts and Mutual Funds

Abstract

Using a matched sample of separately managed accounts (SMAs) and mutual funds (MFs) with the same portfolio manager and investment style, we find that concurrently managed MFs consistently underperform their SMA counterparts and generate more negative return gaps. Fund characteristics and liquidity betas fail to fully explain the underperformance. An event‐study analysis finds that the weights placed into top (bottom)‐performing stocks increase for existing SMAs (MFs) and negative return gaps increase for the MFs after the onset of concurrent management. We find that higher compensation collected by SMA fund managers are associated with more unseen managerial actions which positively contribute to the SMA return gap. Our results suggest that when managers concurrently manage both SMAs and MFs, they favor SMA performance over their MF performance.

Fraternal twins—Should investors be careful?*

“…One issue of this matching approach at the firm and objective levels is that it does not correctly control for managerial skill. In a similar study, Chen et al (2017) compared with MFs. As in Chen et al (2017), we address this issue by our implementation of twin analysis, but as seen from the results above, we can only confirm their findings for net returns and not for gross returns.…”

“…In a similar study, Chen et al (2017) compared with MFs. As in Chen et al (2017), we address this issue by our implementation of twin analysis, but as seen from the results above, we can only confirm their findings for net returns and not for gross returns. However, since this study predominantly investigates the question of whether the performance of twins with similar portfolios (identical twins) differs cross-sectionally from the performance of twins with different portfolios (fraternal twins), whether MFs and SAs perform differently within the twin is not important to our analysis.…”

“…Morningstar provides detailed information on the names and terms of individual managers for both vehicles, the investment companies and the vehicles' positions in the Morningstar equity style box. As in Evans and Fahlenbrach (2012) and Chen et al (2017), we aggregate different mutual fund share classes at the fund level. Variables such as returns and fees are size-weighted, and size itself is aggregated.…”

“…SAs usually do not have multiple share classes because each investor holds her own portfolio and negotiates fees individually. Following Chen et al (2017), some funds are used multiple times to form twins in case managers have an unbalanced number of SAs and MFs fulfilling the twin definition. Furthermore, we obtain quarterly holdings reports for SAs and MFs from Morningstar.…”

“…After the implementation of an institutional twin, expenses for retail MFs decrease, while different proxies show that managerial effort increases. In a performance comparison, Chen et al (2017) analyze managers that concurrently manage at least one SA and one MF. Their results show significantly better performance for SAs compared with MFs.…”