Investors, particularly retail investors, choose portfolio managers based on a number of
factors, which typically include trust and reliability. The author examines how investors
react when these trust-dependent relationships are disrupted and finds that fund outflows
increase after the announcement of fund ownership changes.
Trust is an integral part of the investment management process, and any relationship
disruption can have negative consequences. The author finds that mutual fund outflows
increase after the announcement of changes in a fund’s ownership (and thus a turnover
in advisers), amounting to 7% of assets under management within a year after the change. The
author notes that retail investors are responsible for these fund outflows, which tend to be
higher if the acquiring firm has legal issues and are more pronounced for higher-expense
funds. Each of these findings suggests that investors value highly a trusting
How Is This Research Useful to Practitioners?
Investment professionals should recognize that investors have a myriad of available options
for investment management services and that numerous factors can influence investors,
particularly retail investors, to exhibit certain behaviors. As managers of investments,
these market practitioners should know that, in addition to performance, clients expect a
certain level of trust and reliability. Portfolio managers should respond accordingly by
taking steps to develop a high level of trust and by maintaining a high level of
reliability. The author demonstrates that any deterioration of this relationship will
probably have adverse consequences. Investment management firms should be aware of the
perception of trust when managing their business given the author’s finding that
barriers to trust, such as legal issues, can be perceived negatively and can damage a
client’s trust in investment managers.
A client’s needs should be of the utmost importance in the investment management
industry, and it is imperative to recognize that these needs are broader than just risk and
return. A client’s needs include the fostering of the underlying relationship and
providing a level of comfort that the client’s interests are being taken care of.
How Did the Author Conduct This Research?
The author uses data primarily from the CRSP Survivor-Bias-Free US Mutual Fund database,
annual Morningstar Principia CDs, and the SDC Platinum Mergers & Acquisitions database
as well as from the SEC Investment Adviser Public Disclosure database, EDGAR, and Compustat.
The mutual fund sample comprises all domestic, diversified, and actively managed equity
mutual funds over 1995–2012. Funds are then excluded that are outside the nine main
style boxes. Index funds are excluded by removing funds that contain the words index,
S&P, Dow Jones, and NASDAQ. Funds with less than $10 million in assets under management
are also excluded.
The author then focuses on 185 events covering 843 funds with $587 billion in assets under
management at the time of the change announcement. He performs various statistical and
regression analyses to determine how fund flows change in reaction to changes in the
ownership of the fund’s management company. He further dissects the data to better
understand fund inflows versus outflows, the impact of the distribution channel, and the
effect of legal controversies. Finally, the author uses a multivariable panel regression to
determine that retail investors are slow to react to change announcements.
The author attempts to quantify the impact of disrupting a relationship built on trust. The
author’s findings support the notion that investors value their relationship with
investment professionals and will invest elsewhere if this relationship is disrupted. I
would like to see further research expand on these findings to determine what types of
marketing are most effective at promoting trust and reliability.