Richard Evans (Darden School of Business – University of Virginia)
24 June 2019 @ 12:45 - 13:45
“Peer versus pure benchmarks in the compensation of mutual fund managers”
Abstract: We examine the role of peer (e.g. Lipper Manager Benchmark) vs. pure (S&P 500) benchmarks in mutual fund manager compensation. We find that while the majority of portfolio managers are compensated based on some combination of peer and pure benchmarks, 29% (21%) of portfolio managers report compensation based only a peer (pure) benchmark. Funds with peer-benchmark compensated managers charge higher fees, but still outperform on a risk-adjusted net performance basis. Pure-benchmark compensated managers, on the other hand, exhibit lower active share and return gap, as well as higher R2, consistent with less effort and/or ability. In assessing the advisor level determinants of the peer/pure benchmark decision, we find that advisors that choose peer-benchmarking are relatively larger, focused on a lower number of client types, more likely to be direct distributed and located in cities with less asset managers. Overall, these results are consistent with market segmentation playing a role in the difference between peer and pure benchmarked investment advisors.