performance teammgmtvsindividual bliss

11
Performance Characteristics of Individually-Managed versus Team-Managed Mutual Funds RICHARD T. BLISS, MARK E. POTTER, AND CHRISTOPHER SCHWARZ RICHARD T. BUSS is an associate professor of finance at Babson College in Babson Park, MA. MARK E. POTTER is an associate pmfessor of fimiice at Babson College in Babson Park, MA. potterina@ habson.edu CHRISTOPHER SCHWARZ is a doctoral candidate at the University of Massa- chusetts in Amhcrst. chris [email protected] T he mutual fund industry has expe- rienced extraordinaty growth in the last two decades. At the end of 2005, the combined assets of U.S. mutual funds approached S9 trillion, up from S370 bil- lion in 1984, while the number of individual funds grew from 1,200 to almost 9,000 over the same period (ICI [2006, pp. 7-8]). In 1984, only 12% of U.S. households owned mutual funds, but by 2005, the number had quadru- pled to 48%, representing 54 million U.S. households (ICI [2006, p. II]). Along with this growth came consider- able scrutiny of the managers running these mutual funds. Those guiding the largest and most successflil flinds cotiimanded multi-million dollar salaries and appeared on magazine covers and television talk shows discussing their invest- ment secrets and offering advice. Debates about value versus growth strategies, glamor stocks, efficient markets, and the pros and cons of indexing were commonplace. Each year, the "winners" saw the assets they managed grow exponentially, while the "losers" lost investors or, in extreme cases, were ftred. A large body of academic research has been devoted to assessing individual mutual fund managers and their performance. This research has evaluated the impact of numerous factors on fund per- fortnance, including the futid's size, structure, and expenses; the age, tenure, educational level and compensation of the manager; and the turnover and risk profile of the fund. This focus on individual managers over- looks an important trend in mutual fund man- agement, i.e., each year tnore funds are managed by groups or teams of individual managers. Morningstar data hsts "Management Team" or multiple individual managers by name for 60% of all equity flinds in 2003, up substantially from just 30% iti 1992. The SEC s recent rule changes regarding the disclosure of more information on the members of management teams high- light the importance of this trend to investors.' One explanation is that fund companies are using team management to avoid falhng victim to "stars" that leave (Kovaleski [2000]). Another explanation is that groups make better decisions in the areas of selecting and managing a stock portfolio. In this article, we consider the manage- ment company's choice of individual versus team management. Specifically, we look at dif- ferences in perfortnance, risk, expenses, and turnover. The theoretical bases for this analysis are found in existing research about the dif- ferent processes—and the ensuing results— used by individuals and groups to make decisions. We do not purport to provide insight into the fund managers' decision-making process. This question, while certainly inter- esting, is beyond the scope of this article. Our focus is on discernible differences in the char- acteristics of individually-managed versus team-managed mutual funds. 110 PEKFORMANCE CHARACTERISTICS OF INDIVIDUALLY-MANAGED VERSUS TEAM-MANAGED MUTUAI. FUNDS SPRING 2008

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Page 1: Performance teammgmtvsindividual bliss

Performance Characteristicsof Individually-Managed versusTeam-Managed Mutual FundsRICHARD T. BLISS, MARK E. POTTER,

AND CHRISTOPHER SCHWARZ

R I C H A R D T . B U S S

is an associate professor offinance at Babson Collegein Babson Park, MA.

MARK E . POTTER

is an associate pmfessor offimiice at Babson Collegein Babson Park, MA.potterina@ habson.edu

C H R I S T O P H E R

SCHWARZ

is a doctoral candidateat the University of Massa-chusetts in Amhcrst.chris [email protected]

The mutual fund industry has expe-rienced extraordinaty growth in thelast two decades. At the end of 2005,the combined assets of U.S. mutual

funds approached S9 trillion, up from S370 bil-lion in 1984, while the number of individualfunds grew from 1,200 to almost 9,000 overthe same period (ICI [2006, pp. 7-8]). In 1984,only 12% of U.S. households owned mutualfunds, but by 2005, the number had quadru-pled to 48%, representing 54 million U.S.households (ICI [2006, p. II]).

Along with this growth came consider-able scrutiny of the managers running thesemutual funds. Those guiding the largest and mostsuccessflil flinds cotiimanded multi-million dollarsalaries and appeared on magazine covers andtelevision talk shows discussing their invest-ment secrets and offering advice. Debates aboutvalue versus growth strategies, glamor stocks,efficient markets, and the pros and cons ofindexing were commonplace. Each year, the"winners" saw the assets they managed growexponentially, while the "losers" lost investorsor, in extreme cases, were ftred. A large bodyof academic research has been devoted toassessing individual mutual fund managers andtheir performance. This research has evaluatedthe impact of numerous factors on fund per-fortnance, including the futid's size, structure,and expenses; the age, tenure, educational leveland compensation of the manager; and theturnover and risk profile of the fund.

This focus on individual managers over-looks an important trend in mutual fund man-agement, i.e., each year tnore funds are managedby groups or teams of individual managers.Morningstar data hsts "Management Team" ormultiple individual managers by name for 60%of all equity flinds in 2003, up substantially fromjust 30% iti 1992. The SEC s recent rule changesregarding the disclosure of more informationon the members of management teams high-light the importance of this trend to investors.'One explanation is that fund companies areusing team management to avoid falhng victimto "stars" that leave (Kovaleski [2000]). Anotherexplanation is that groups make better decisionsin the areas of selecting and managing a stockportfolio.

In this article, we consider the manage-ment company's choice of individual versusteam management. Specifically, we look at dif-ferences in perfortnance, risk, expenses, andturnover. The theoretical bases for this analysisare found in existing research about the dif-ferent processes—and the ensuing results—used by individuals and groups to makedecisions. We do not purport to provide insightinto the fund managers' decision-makingprocess. This question, while certainly inter-esting, is beyond the scope of this article. Ourfocus is on discernible differences in the char-acteristics of individually-managed versusteam-managed mutual funds.

110 PEKFORMANCE CHARACTERISTICS OF INDIVIDUALLY-MANAGED VERSUS TEAM-MANAGED MUTUAI. FUNDS SPRING 2008

Page 2: Performance teammgmtvsindividual bliss

We develop hypotheses and evaluate them using asample of several thousand actively managed domestic andinternational mutual funds. We fmd that the performanceot mutual funds managed by teams is similar to individually-managed funds on a risk-adjusted basis. In spite of this, thenumber of team-managed funds has grown at a significantlygreater rate over the past 12 years. When investigated fur-ther, we fmd that team funds have significantly lower riskthan their individually-managed counterparts and exhibitlower cross-sectional differences in their performance andsystematic portfolio factor loadings. We also fmd that team-managed funds have significantly lower expenses and loadsthan individually-managed funds.

The following section reviews the relevant litera-ture and develops the hypotheses we test, followed by adiscussion of our data, methodologies, and results. Weconclude with a summary of our fmdings and suggestionsfor future research.

LITERATURE REVIEW

In an ideal world of classical finance, it should notmatter whether groups or individuals are making decisionsbecause the goal is the same: to maximize end-of-periodwealth, or total returns, over a particular time period (Arrow11986]). However, the fields of psychology and behavioralfinance, among others, make it clear that groups make deci-sions differently than individuals and in many situationsproduce better results. Bainbridge [2002] provided anexcellent overview of the theoretical differences andclearly described why and in what situations groups willmake better decisions. We defer to his work and focusfirst on the large body of experimental evidence sup-porting this claim.

Early findings unrelated to investment management(Hill 11982]) indicated that groups, on average, make supe-rior decisions compared to individuals. For the groups inthe Hill stLidy, however, interaction was otherwise limited.Clearly, such a limitation is not the case with teams offund managers who may interact frequently with oneanother. However, the reason for Hill's conclusion maystill apply—groups made better decisions due to poolingand aggregating disparate pieces of information. In addi-tion, VoUrath et al. [1989] found that groups recall infor-mation more accurately, leading to better-informeddecisions.

Blinder and Morgan [2005] used two differentexperiments that yielded similar and striking results.

The most surprising fmding is that no difierence exists inthe time it takes groups and individuals to reach a deci-sion, even though in both experiments group decisionswere superior. Miner |1984] used an experiment that testsevaluative judgment applied to a comple.x problem, a sit-uation relatively similar to those faced by mutual fundmanagers. Miner found that groups did a better job, butnot better than the best individuals. The problem is thatthe best individuals could only be identified ex post basedon their performance on the experiment.

There are a few popular press and academic arti-cles on the performance of group and individual mutualfiand managers. Bloomberg Business Services looked atU.S. equity funds from 1982 to 1997, and reported that"multiple-management returns outpaced those ofindividually-managed funds by 1.2% per year" (Powers[1997]). They attributed this to better discipline and coop-eration. A Fortune article found the opposite for the three-year period 1992-1995 reporting that "single-managedfunds outperformed team-managed funds by 1.2%, andteams lost in 13 out of 16 categories" (Prochniak [1996]).

In the academic arena, Prather, Middleton, andCusack [2001], and Prather and Middleton |2(H)21 con-sidered the question of individual versus team managementof mutual funds. The first article analyzed 148 Australianinvestment funds from 1993 to 1998, concluding thatthere is "no significant risk-adjusted performance differ-ence between multi-sector trusts managed by teams andthose managed by individuals." Prather and Middleton[2002] used a sample of 162 U.S. mutual funds for theperiod 1981-1994. Their sample consists of 147 fundsmanaged by individuals and 15 managed by teams. A morerecent working paper by Baer, Kempf, and Ruenzi [2005]found team-managed funds exhibit marginally lower riskand more persistent returns, and experience greater inflowsover time.

Our work extends this prior research in severalnotable ways. First, our sample is much larger, encompassesa long time-period, and has a more balanced proportionof team-managed and individually-managed funds.Second, by using a unique dataset that combines the Morn-ingstar and CRSP databases, our results are more robustand less susceptible to data errors. Third, we use morecurrent methodologies to evaluate performance and risk.

In spite of the ambiguous evidence on perfor-mance to date, we believe the theory and evidence onthe superiority of group decision making is compelling.Because of this, we expect that, a priori:

SPRING 2U08 THE JDURNAL OF PORTFOLIO MANAGEMEN"! I l l

Page 3: Performance teammgmtvsindividual bliss

• mutual fijtads managed by more than one individualwiU exhibit better performance than mutual fundsmanaged by a single individual, and

• because groups make better initial decisions, port-folio turnover of tnutiial funds managed by groupsWTH be lower than portfolio turnover of mutual fundsmanaged by individuals.

Other research (e.g., Isenberg [1986]) has addresseddifferential risk-taking by groups and individuals. Specif-ically, groups tiiay exhibit more risk-taking behaviorbecause introducing a number of alternatives may lead topolarization toward an option with the most positive argu-ments supporting it, even though it may contain the mostrisk. As such, we also expect that

• mutual funds managed by more than one individualwill exhibit more risk-taking activity than mutualfunds managed by an individual.

Using these three hypotheses, this article providesthe first comprehensive empirical study on the differen-tial performatice and risk-taking activity of portfoliosmanaged by teams and individuals.

DATA AND METHODOLOGY

We collected data fixjm Morningstar and the Centerfor Research in Security Prices (CRSP). The CRSP dataare widely accepted in the literature, at least for researchrelated to the equity market, but previous research hasshown that the Morningstar data are more accurate andcomplete (Elton, Gruber, and Blake [2001]). Morningstarprovides quarterly CD updates of open-end mumal funds.Each dataset lists fund information including the currentmanagers, monthly returns, and various fund statisticssuch as expense ratio and turnover. Our sample starts inthe fourth quarter of 1992 and ends in the fourth quarterof 2003. The CDs do not contain dead funds. Thus, eachquarter's data are extracted from the original CD to avoidsurvivorship bias. The number of funds listed for eachperiod ranged from just under 4,000 to over 18.000. Thesecond data source is the CRSP Mutual Fund database.As with Morningstar, the CRSP dataset includes monthlyreturn data and stretches fi-om the fourth quarter of 1992to the fourth quarter of 2003." After 1999, the CRSPdataset provides quarterly updates of managers, turnover,and expense ratios, as well as other data categories. Prior

to 1999, however, only yearly updates are available.These two datasets were combined using identifiable keyfields and hand sorting when necessary, providing a uniquedataset that is as complete and accurate as possible.

Neither of the two datasets provides overall fundinformation, but lists each share class separately. We mergedshare classes of funds together to yield a final and completedataset that consists of all unique tnutual funds. Essentially,the data-cotnbining techniques we use in this article areconsistent with the approach employed by Daniel et al.[1997]. To measure fund performance, we rely on theapproaches used by Carhart [1997], and Chevalier andEllison [1999]. A number of factors have been shown toinfiuence a fund's cross-sectional variation in performance,including the fund portfolio's exposure to a market {p)factor, momentum factor, size factor, and market-to-bookratio. Carhart's methodology is standard for mutual fundstudies and incorporates these factors into the performanceanalysis in order to compute a fund's risk-adjusted alpha.

When studying fund flow difTerences, we employSirri and Tufanos [1998] performance regression method-ology including their flow calculations, ranking system,and control variables. Flows are a percentage of the pre-vious period's assets:

Assets — Assets ,How. = '— '-'

*(1 + Retumj

Assets ^

As in Sirri and Tufano [1998], this calculationassumes investor flows take place at the end of the period.We compute flows on a yearly basis and winsorize the top5% to protect against data inconsistencies and newlyreported share classes. If a fund has less than $10 millionin assets, we exclude it from that month. We also excludeaU passively managed (index) funds from the analysis.

At the end of 1992, there were 1,168 distinct activelymanaged equity mutual funds, of which approximately30% were team-managed (Exhibits 1 and 2)."' By 2003, thetotal number of actively managed equity mutual Rinds morethan doubled to 2,639, yielding a compounded annualgrowth rate (CAGR) of 7.7%. However, team-managedfunds grew much more quickly (CAGR = 13.8%) thanfunds managed by individuals (CAGR = 3.3%) and, as aresult, increased to 56% of the total. Most of the growthin team-managed funds came fh)m new funds, rather thanfunds switching to team-based management, and althoughthe number of flinds switching management styles has been

112 PERFORMANCE CHARACTERISTICS OF INDIVIDUALLY-MANAGED VERSUS TEAM-MANAGED MUTUAL FUNDS SPRING 2008

Page 4: Performance teammgmtvsindividual bliss

E XH I B IT 1Equity Mutual Funds Managed by Teams over Time: 1993-2003

Exhibit 1 presents sample summary statistics over time. This includes a total count of equity mutual funds at year-end, divided into funds man-aged by individuals and those managed by more than one individual (Team). The "Switch" columns indicate the number of mutual flinds thatreported a management change in each year. "Fund Deaths" is the number of funds disappearing ftom the sample during the year.

Year

19931994199519961997199819992000200120022003

Total

11681394

161917151937216124292402259726162639

Individual

813950105510601095110911501115118412081163

Team

355444564

65584210521279128714131408

1476

%Team

30%32%35%

38%43%49%53%54%54%54%56%

Switch toIndividual

10141426202617211618

Switchto Team

111719475326

39261634

Fund Deaths

Individual

61157

52778351102

788382

Team

688

2333394288104114132

E X H I B I T 2

Mutual Funds Managed by Teams over Time

3000

2500

•a

I

I

2000

1500

1000

500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

small, they do favor a switch to team management. Thenumber of funds that "died" is approximately equal on aproportional basis. An average of 8.0% of individually-

managed funds and 7.2% of team-managed funds did notsurvive each year.

SPRING 2008 THE JOURNAL OF PORTFOLIO MANAGEMENT 1 1 3

Page 5: Performance teammgmtvsindividual bliss

Exhibits 3 and 4 provide insights into how major fundfamilies modified their fund management structures overtime. Of the ten largest fund families. Fidelity, MerrillLynch, and Dreyfus are the only complexes that continueto prominently utilize individually-managed mutual flinds.American, Franklin, and Putnam are the three flmd fam-ilies that use team-managed funds most extensively (over90%). The dispersion of management type by fluid family

is also extensive for smaller fund families. At the end of1992, the vast majority of fund families had fewer than15% of their funds managed by teams. By 1998, most ofthe fund families moved to team-managed flinds; this shiftcontinued to persist to the end of our data sample in 2003.

Although the total percentage of funds managed byteams stood at 56% by the end of 2003, the individualfund style categories exliibited significant variation. Teams

E X H I B I T 3

Management Types by Fund Family

Exhibit 3 represents the proportion of team-iiiaiiaged funds (by number of fimds) for the 10 largest fund families between 1993 and 2003.Exhibit 4 indicates the number of fund families that have varying degrees ot" team-managed ftmds in 1992, 1998, and 2003.

Fund Family

Fidelity Group

Vanguard Group

American Funds Group

Franklin Group of Funds

Putnam Funds

Merrill Lynch Group

Dean Witter Funds

(Morgan Stanley Dean Witter post-1998)

IDS Group (American Express post-1998)Dreyftis Group

Price T. Rowe Funds

1993

2%63%91%71%

37%41%

6%9%

20%20%

1995

1%58%92%

89%

45%32%

18%3%

19%32%

1997

9%65%

100%98%

55%

27%

22%12%15%36%

1999

11%75%

100%96%

67%15%

46%15%13%40%

2001

6%73%

100%91%

66%19%

63%45%19%40%

2003

7%70%

100%92%

91%

19%

75%36%18%35%

E X H I B I T 4Distribution of Manager Type by Fund Family

45

• 1992• 1998a 2003

0.0% 12.5% 25.0% 37.5% 50.0% 62.5% 75.0%

Proportion of Team-Managed Funds

87.5% 100.0%

114 PERI-OkMANCE C^UAKACTERISTICS OF INDIVIDUALLY-MANAGED VERSUS TtAM-MANAtiEl ! MUTUA) FUNIJS SPRING

Page 6: Performance teammgmtvsindividual bliss

managed 60% of equity funds and 50% of bond funds.A high percentage of funds in the global and asset allo-cation categories were managed by teams compared to alow percentage of funds in the municipal bond and spe-cialty fund categories. For the funds, we also comparedthe proportion of assets under management as shown inExhibit 5 and discovered few discernible differences.The breakdowti betweeti individually-managed andteam-managed funds just described is consistent withthe theot^ that teams are able to tnore appropriately andefficiently process disparate data in diffuse informationenvironments, whereas individuals tnay be more apt toperform well in focused yet complicated arenas.

RESULTS

Previous literature in psychology and sociology pro-vides guidance as to when atid how groups will perfortiidifferetitly than individuals. To measure whether fundstnanaged by teams outperform those managed by indi-viduals and, more generally, whether this choice can

E X H I B I T 5Mutual Funds Managed by Teams over Time—By Category

Exhibit 5 presents the proportion of team-managed funds by categoryon December 31, 1992, and December 31, 2003, by number of fundsand total net assets.

Proportion of Team-Managed Funds[by tiumber of futids and total net assets]

All Equity Funds

Aggressive Growth

Equity Income

Growth

Growth and Income

Income

Small Company

All Bond Funds

Corporate

Municipal

Government

World

Other Fund Categoric!

Asset Allocation

International

Specialty Funds

1992#Fuads

18%13%

17%

17%

16%

33%

16%

11%

17%

6%

12%

16%

i 18%

34%

19%

11%

Net Assets

34%

17%

17%

28%

42%

80%

32%

14%

24%

6%

12%

19%

23%

24%

29%

34%

# Funds

60%

55%

58%

58%

62%

55%

59%

51%

56%

45%

55%

56%

58%

66%

63%

48%

2003Net Assets

57%

51%

42%

48%

70%

74%

56%

54%

49%

43%

62%

61%

63%

77%

70%

57%

explain cross-sectional differences in returns, we employa number of empirical techniques.

Exhibit 6 presents Carharts [1997] methodology todissect differences between the performance and port-folio factor loadings of the two groups. We run annualregressions each year from 1993 through 2003 to com-pute the alpha and factor loadings for each fund. We thenperfortn a regression analysis including controls for size,expenses, and turnover, including an individual manage-ment dummy on fund alphas atid loading factors.Individually-managed funds have a dummy value of oneand team tunds have a dummy value of zero. We utilizeFania and Macbeth s [1973] methodology to compute coefficients and /-values for the entire period. For brevity, weonly report the results ot the performance dummy variable.Overall, after controlling for systetiiatic portfolio risk fac-tors, there are no statistically or economically significantdifferences in performance between individually-managedand team-managed mutual funds. These results stronglyreject the theory in this area and provide a basis for fur-ther exatiiination given the tretnendous increase in team-tnanaged funds in the past 12 years. Future research onthe iiiner workings of team-managed funds may provideadditional insights.

When examining the factor loadings, a clear patternemerges for the market (fi) factor (RMRF). Individually-managed funds have more market exposure. This resultis significant at the 1% level over the entire sample as wellas in four ofthe eight individual categories. Given thelack of statistical signitlcance of the other three factorloadings, it appears team-managed funds exhibit signifi-cantly less risk than individually-managed funds.

To examine this further, we report the annual stan-dard deviation of funds in Exhibit 7. We compute theaverage standard deviation of each fund management typefor each year from 1993 through 2003. We then employthe methodology of Fama and Macbeth [1973] to com-pute overall coefficients and /-statistics. The annualizedstandard deviations of individually-managed mutual fundsare signiftcantly higher than those of team-managed mutualfunds. While the category subset differences are not asconsistent as the tnarket factor loadings illustrated inExhibit 6, the overall pattern in the category subsets reaf-ftrnis our conclusion that team-managed flinds have sig-nificantly lower risk. These results directly refute evidencefound by Isenberg [1986] in the psychology literature.

We also itivestigate the cross-sectional distributionot performance tiieasured by Carhart alphas and die factor

SPRING 2008 THEJOURNAL OF PORTFOLIO MANAGEMENT 1 1 5

Page 7: Performance teammgmtvsindividual bliss

E X H I B I T SPerformance Differences by Management Type

Exhibit 6 shows the alpha and beta coefficients from the Carhart [1997] model. Results arepresented for all equity mutual funds and individual categories. Regressions were run withthe following dependent variables: Carhart Alpha, RMRF beta (market factor), SMB beta(size factor), HML beta (market-to-book factor), and UMB beta {momentum factor). Adummy variable for individually managed fimds was included in the analysis to detect dif-ferences between individually managed and team-managed funds. Control variables includethe Ic^ ofthe Hind's assets, turnover ratio, and expense ratio. Only the dummy variable resultsare included for brevity.

Investment ObjectiveAggressive GrowthBalancedDiversified Emerging MarketsGrowthGrowth and IncomeIncomeSmall CompanySpecialtyOverall

Alpha-0.02%-0.01%-0.01%0.02%

-0.04%0.05%0.03%

-0.06%0.03%

RMRF0.07**0.020.03*

-0.010.020.06***0.000,06**0.04***

*, **, atid *** represent statistical significance at the W%,

SMB-0.060.030.000.000.07

-0.05***-0.040.010.02

5%, and

HML0.050.030.010.030.04

-0.02-0.0!0.090.03

UMB-0.010.02

-0.04*-0.01-0.020.00

-0.03*'-0.01-0.01

1% level, respectively.

E X H I B I T 7Mutual Fund Risk (Standard Deviation) by Management Type

Exhibit 7 presents the average yearly standard deviation for both team-managed and indi-vidually managed funds over the 1993-2003 period. We compute the standard deviationsand differences each year. Overall differences and r-values are computed using Fama andMacbeth |1973|. Overall and category results are reported.

Investment ObjectiveAggressive GrowthBalancedDiversified Emerging MarketsGrowthGrowth and IncomeIncomeSmall CompanySpecialtyOverall

Team21.46%

8.99%22.53%16.94%14.00%U.14%19.86%20.30%16.22%

Individual21.95%

9.65%23.00%16.72%13.91%11.96%19.57%21.84%17.02%

DifTerence-0.49%*-0.66%-0.47%**0.22%0.09%-0.82%***0.29%-1.55%**-0,80%***

and *** represent statistical signijicance at the 10%, 5%, and 1% level, respectively.

loadings of our two samples. Each year we compute thedifference between the cross-sectional standard devia-tions of both management types.^ The results are inExhibit 8. The distribution ofthe standard deviations forperfortnance and loadings is consistently lower for team-managed funds when compared to individually-managedfunds. In other words, team-managed funds were muchmore likely to perform close to their category averages.

Next, we review the nature of thetrading activity and expenses between flindsmanaged by teams and individuals. For eachyear, we run regressions with turnover,expenses, and total loads as the dependentvariable. We include cotitrols for size anda dutnmy variable for those funds matiagedby individuals. Results are in Exhibit 9.

We tind no significant differences inoverall turnover between team-managedand individually-managed funds. We dofmd, however, that for categories whichmight be expected to have more disparatecompany information (e.g., aggressivegrowth, growth, and small company),turnover is higher for individual managerswhich is consistent with the hypothesis thatteam-managed funds process diffuse infor-mation more efficiently. For fund categorieslikely to include equities of ftrms with morefocused or complete information (e.g., spe-cialty and income), teams exhibit signifi-cantly higher turnover.

Regardless of trading volume andturnover, the level of fees and loads is sig-nificandy higher for individually-tnanagedfunds. This result is positive and significantin six of eight categories for both expensesand loads. Based on the previous turnoverresults, we can conclude this is not due toa difference in trading styles, nor does itappear to be capturing a fund-family effectbecause most fund families contain a mix ofteam-managed and individually-managedfunds. Given the overall lack of differencesin risk-adjusted performance, the tremen-dous growth in the use of teams could berelated to risk reduction and cost savings formanagement companies and ultimately forinvestors.

Finally, we analyzed fund flow differ-ences conditioned on manager type. Sirri and Tufano's[1998] methodology allows us to disentangle fund flowsfrom a number of variables including performance, size,risk, and fees, while correcting for overall category fiows.We exatnined all equity-category flows in one model andgrowth-related fund flows in a second model. We added a

116 PEHFORMANCE CHARACTERISTIC OF INDIVIDUALLY-MANAGED VERSUS TEAM-MANAGEH MUTUAL FUNDS SPRING 2008

Page 8: Performance teammgmtvsindividual bliss

E X H I B I T 8Distribution Comparison of Performanceand Portfolios '

Exhibit H exiimines the distribution of the alpha and beta coefficients fromthe Carhart (19971 model. The difference in the cross-sectional distri-bution's standard deviation betvk^en team-managed and individually-managed ftinds is presented along with ovtT.iI! coefficients computedusing Fama and MacBeth (1973]. Panel A reports results for non-growth fund categories, while Panel B reports results for funds ingrowth categories.

Panel A: Noa-GrowlhYear1994199519961997199819992000200120022003

Average

Year1994199519961997199819992000200120022003

Average

*. **. atid

Ah>b«-0.0000.001

-0.00!-0,013-0.002-0.000-0.002-0,002-0.001-0.001

-0.002*

Alpha-0002-0.002-0.002-0.001-0.003-0,002-0.001-0-002-0.002-0.001

-0.002"'

RMRF0.000

-0.001-0.000-0.002-0,001-0.000-0.0010.0000,000

-0,001

-0.001-

Panel B:RMRF

0,000-0,001-0,000-0,000•0,001-0.0000.0000.0010,001

-0,000

' -0.000

SMB-0,001-0.001-0,001-0,002-0.001-0,000-0.002-0,000-0.000-0.002

-0 .001""

HML-0.001-0.001-0.001-0,005-0,003-0.001-0.001-0,001-0,001-0.003

-0.002"*

: Growtb FnndiSMB-0,000-0,001-0,000-0.000-O.OOl•0000-0.0000,0000.000

-0,000

-0.000

HML-0.0011-0,0001-0,0002-0,0009-0,0004-0,0004-0,00020,00050,0003

-0,0006

-0.0003*

*** represent statistical significance at the iO%,lei'ei, respectively.

PRIYR-0.0010.000

-0,000-0,001-0,002-O.OOI-0.001-0.001-O.OOI-0.001

-O.OOI***

PRIYR-0.0006-0,0003-0,0006-0,0006-0.0002-0,0004-0,00050,00030,0003

-0,0006

-0.0003**

5%, and 1%

dummy variable for flinds managed by individuals. Exhibit10 reports the results.

Model 1 contains any flind in an equity-related cat-egory, including specialty funds. Model 2 contains onlyfunds belonging to the aggressive growth, growth, andgrowth-and-income categories. Only these categories aretypically included in the Sirri and Tufano (1998) analysis.

Consistent with other studies, performatice by rankis a significant determinant of ftind flows. We find that thehighest-performing (High Rank) funds receive the mostnew money'' We also find a positive and significant coef-ficient on the lowest-performing funds (Low Rank). Thisflow of funds to poor-performing fund.s is smaller than forthe good perfortners and may be attributable to an investorbelief that the worst funds will reverse their poor perfor-

mance.' Fund flows are negatively related to size, and risk,measured by standard deviation, is not a statistically mean-ingfiil factor when the other variables are considered. Fundflows are positively related to fees, which is consistent withprevious studies that show a positive relationship betweensales and marketing fees and fund flows. Most importantly,the dummy variable is statistically significant for both of ourmodels, although only at the 10% level for the entire samplein Model 1. The interpretation is that even after correctingfor performance, risk, size, and expenses, team-managedmutual funds receive about 3% greater fund flows per yearthan individually-managed mutual funds, perhaps due tothe perceived stability or continuity of the fund manage-ment structure-

CONCLUSION

In the past 15 years, the growth of team-managedmutual funds has far outpaced the growth in individually-managed mutual funds. This is true across all fund cate-gories and a broad base of fund families. In this empiricalanalysis, we reviewed performance and risk differencesbetween team-majiaged and individually-managed mutualfunds. We find team-managed and individually-managedfunds exhibit similar risk-adjusted performance, but wealso find evidence that team-managed funds have signif-icantly lower risk. In addition, the standard deviations ofthe distributions of alphas and factor loadings are smallerfor team funds, indicating that team-managed funds mayhold more clustered portfolios.

We also find evidence of differences in turnoverbetween the two groups. Team funds exhibit lowerturnover in disparate information settings, but higherturnover when information is more focused or complete.Finally, we find evidence that team funds have lowerexpenses and loads than individually-managed funds bynearly 50 basis points per year, and that teams attract fundflows at a significantly greater rate than do individually-managed mutual funds.

Our research and results suggest several avenues forBiture study. Our study focuses only on whether a fundis team-managed or individually-managed, but the actualprocess utilized by teams to make portfolio decisions is ofsignificant interest. Although the team decision-makingprocess is beyond the scope of this article, it is ripe for addi-tional research. There are also teams and individuals thatmanage multiple funds. This phenomenon may be afruitful path for additional research. Lastly, our finding of

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Page 9: Performance teammgmtvsindividual bliss

E X H I B I T 9

Character Differences by Management Type

Exhibit 9 examines the difference in operational aspects of team-managed and individually-managed funds by running regressions with turnover, expenses, and total loads as dependentvariables. OLS regression results are reported for our entire sample as well as subsamples byinvestment category. We run yearly regressions that control for size and include a dummyvariable that is one it a fund is a single manager fund and zero otherwise. Overall coefficients,(-values, and p-values are computed using Fama and Macbeth [1973]. For brevity, onJy thedummy variable results are reported.

Investment Objective 'Rirnover ExpensesTotalLoads

Aggressive GrowthBalancedDiversified Emerging MarketsGrowthGrowth and IncomeIncomeSmall CompanySpecialty

Overall

25.39%*-13.13%***

0.62%15.14%***-0.03%-9.21%***9.97%***

-79.86%*

-2.03%

0.18%***0.05%0.11%**0.03%**0.18%***

-0.10%***0.08%***0.07%**

0.10%***

0.63%*0.30%*0.58%***0.36%***0.16%*0.03%0.42%**

-0.05%

0.39%***

*, **, and *** represent statistical significance at the 10%, 5%, and 1% level, respectively.

E X H I B I T 1 0

Equity Fund Flows by Manager Type

Exhibit 10 examines the difference in investor behavior toward team-managed andindividually-managed funds. Model 1 examines the results using funds in all equity-relatedcategories, while Model 2 examines the aggressive growth, growth, and growth-and-income categories. Both panels use data frotn 1993 to 2004 as well as the Sirri and Tufano[1998] piecewise regression methodology, which controls for perfonnance, size, risk, andsegment flows. The single dummy indicates one if the fund manager was an individualand zero otherwise. Overall result coefFicients and f-values are computed using Fama-Macbeth [1973] methodology.

Low RankMid RankHigh RankLog AssetsCategory FlowStd. Dev.Total FeesSingle Dummy

Average NAvg. Adj. R-squared

Model 1Coefficient

1.120.542.80

-0.050.89

-0.670.04

-0.02

1,25027.55%

/-value5.55***3.98***4.61***

-5.06***35.66***-0.763.34***

-2.12*

Model 2Coefficient

I.U0.593.23

-0.050.76

-0.140.04

-0.03

67924.38%

/-value5.20***4,12***4.72***

-4,90***6.97***

-0.072.38**

-2.43**

and *** represent statistical significance at the 10%, 5%, and 1% level, respectively.

significant differences in expenses andloads suggests a comparison of manage-rial compensation practices for team-man-aged and individually-managed fundscould also offer valuable insights.

ENDNOTES

The authors would like to thank ananonymous referee and FMA 2005 sessionparticipants for helpful comments, and theBahson Faculty Research Foundation forfmancial assistance.

'Securities and Exchange Commission.Disclosure Regarding Portfolio Managers of Reg-istered Management hwestmetit Companies, 17CFR Parts 239, 249, 270, and 274, ReleaseNos. 33-8458; 34-50227; IC-26533; File No.S7-12-04.

"CRSP data is available before 1992. Wedid not use it for this study, however, becauserelatively few team-managed funds existedprior to this time period. In addition, all fundsidentified as index or enhanced index fundswere deleted from the sample.

•' While preparing the data, severalhighly unusual month-to-month asset changescaused some concern. For example, one fundhas assets of over $3 billion one month, lessthan $1 million the next month, followed bya full recovery to over $3 biHion in the thirdmonth; these unusual changes were reportedto CRSP for their comments.

^Both CRSP and Morningstar list fundmanagers as "Team-Managed" or as a list ofnames {i.e., "Manager A/Manager B/ManagerC"). We categorize all funds with more thanone manager as a "team-managed" fund. Ananonymous referee raised the question of fiandmanagers—individuals or teams—who managemultiple funds. We examined our sample andfound that the vast majority of funds have asingle manager or management team. For theothers, there is no discernible difference, in thefrequency or number of funds managed,between individually and team-managed funds.

"The year 1993 was excluded from thisanalysis because the number of team-managedfunds was small (less than 30) for both non-growth and growth categories.

'This result is consistent with Sirri andTufano [1998], and Elton, Gruber, and Blake

118 >ERFORMANCE CHARACrrERJSTlCS OF INDIVIDUALLY-MANAGED VERSUS T E A M - M A N A G E P MUTUAL FUNDS 2008

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12003].^For their poorest performing quintile, Sirri and Tufano

11998] report "virtually no relationship between historical per-formance and flows." Our findings are similar to those in Elton,Gruber, and Blake [20031.

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