Top Management Turnover: An Analysis of Active Australian Investment Managers

Abstract

Abstract:This study examines the relationship between top management turnover (i.e. investment directors) and investment performance for actively managed Australian funds. This issue is significant given the importance of executive management in the implementation of the institution's investment strategy, the sizeable assets under their control, as well as the overall success and profitability of the funds management operation. In addition, investors, asset consultants, managed fund ratings agencies and the financial media devote significant resources to the scrutiny of performance, the organizational activities, leadership and human capital of investment management firms. Accordingly, this study examines the impact of performance and fund flow activity on top management turnover in both the pre-and-post replacement period. The research documents that turnover of underperforming investment managers results in significantly higher performance in the post-replacement period, while turnover coinciding with outperforming managers delivers investors significantly lower returns. The evidence also identifies significant changes in portfolio risk associated with managerial turnover. Finally, this research documents that underperforming investment managers exhibit significantly lower fund flows prior to replacement.

Institutional investment flows and the determinants of top fund manager turnover

“…To facilitate further tests on this issue, we define a voluntary departure as a manager leaving the company when the fund they manage has obtained positive objective adjusted returns in the year before their departure. This is consistent with the definition of forced departure used in both Khorana (2001) and Gallagher and Nadarajah (2004).…”

“…Khorana, 1996;Gallagher, 2003;Gallagher and Nadarajah, 2004). The studies generally find an inverse relation between the probability of managerial replacement and fund performance and, therefore, conclude that control mechanisms within fund companies are effective.…”

“…As outlined in Gallagher and Nadarajah (2004), the objective-adjusted return (OAR) of a portfolio is the 'n' month holding period return of a fund in excess of the 'n' month holding period return of the appropriate benchmark. This is calculated as follows:…”

Impact of Fund Managers Changes on Polish Equity Funds Performance

“…Furthermore, contrary to Khorana's conclusions, they claimed that a change of fund managers does not improve the performance of funds, where earlier inefficient managers were employed, nor does it deteriorate the performance of funds, where earlier decisions were taken by efficient managers. Gallagher and Nadarajah (2004) found that managerial replacement in Australian equity, fixed income and balanced funds (in the period 1991-2001) resulted in the reversal of performance both for underperformers and outperformers (they used such measures as objective-adjusted return, one-factor alpha and four-factor alpha (only for equity funds)). These conclusions were consistent with Khorana. In the years 1997-2011 Clare, Motson, Sapuric and Todorovic (2014) carried out an analysis of changes of portfolio managers in the UK.…”

On characterizing scale effect of Chinese mutual funds via text mining

“…For example, it is believed that, fund scale increases at the cost of reducing liquidity and increasing administrative expenses, which may result in worse fund performance [2,13,16]; on the contrary, positive impacts, such as economic of scale, are also identified in the mutual fund market [18]. Interestingly, there is also a line of literature claiming no significant correlations [1,12,5,9]. Besides, some researchers have proposed a thresholdbased structure: The cost corresponding to a larger fund scale may increase dramatically only when it is beyond a threshold [22,14,4], such that the performance is associated with the scale via an inverse-U relationship.…”