Skip to main content

You’re Fired! New Evidence on Portfolio Manager Turnover and Performance

  • Leonard Kostovetsky (a1) and Jerold B. Warner (a2)

We study managerial turnover for both internally managed mutual funds and those managed externally by subadvisors. We argue that turnover of subadvisors provides sharper tests and helps address several unresolved issues and puzzles from the previous literature. We find dramatically stronger inverse relations between subadvisor departures and lagged returns, and new evidence on how past flow predicts turnover. We find no evidence of improvements in return performance related to departures, but flow improvements are associated with departures of poor past performers. Our findings represent new evidence on how investors, sponsors, and boards learn about and evaluate mutual fund management performance.

Corresponding author
*Corresponding author:
Hide All
Adams, A.; Mansi, S.; Nishikawa, T.. “Internal Governance Mechanisms and Operational Performance: Evidence from Index Mutual Funds.” Review of Financial Studies, 23 (2010), 12611286.
Berk, J., and Green, R. C.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 12691295.
Cashman, G., and Deli, D. N.. “Locating Decision Rights: Evidence from the Mutual Fund Industry.” Journal of Financial Markets, 12 (2009), 645671.
Chen, J.; Hong, H.; Jiang, W.; Kubik, J. D.. “Outsourcing Mutual Fund Management: Firm Boundaries, Incentives, and Performance.” Journal of Finance, 68 (2013), 523558.
Chevalier, J., and Ellison, G.. “Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance.” Journal of Finance, 54 (1999a), 875899.
Chevalier, J., and Ellison, G.. “Career Concerns of Mutual Fund Managers.” Quarterly Journal of Economics, 114 (1999b), 389432.
Dangl, T.; Wu, Y.; and Zechner, J.. “Market Discipline and Internal Governance in the Mutual Fund Industry.” Review of Financial Studies, 21 (2006), 23072343.
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 10351058.
Del Guercio, D., and Tkac, P. A.. “Star Power: The Effect of Morningstar Ratings on Mutual Fund Flow.” Journal of Financial and Quantitative Analysis, 43 (2008), 907936.
Del Guercio, D.; Reuter, J.; and Tkac, P. A.. “Unbundling the Value of Portfolio Management and Distribution in Retail Mutual Funds: Evidence from Subadvisory Contracts.” Working Paper, University of Oregon (2009).
Ding, B., and Wermers, R.. “Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers and Boards of Directors.” Working Paper, University of Maryland (2009).
Donoho, D. L.; Crenian, R. A.; Scanlan, M. H.. “Is Patience a Virtue? The Unsentimental Case for the Long View in Evaluating Returns.” Journal of Portfolio Management, 37 (2010), 105120.
Duong, T. “Outsourcing in the Mutual Fund Industry.” Working Paper, National University of Singapore (2010).
Fama, E. F., and French, K. R.. “Luck versus Skill in the Cross-Section of Mutual Fund Returns.” Journal of Finance, 65 (2010), 19151947.
Fama, E. F., and MacBeth, J. D.. “Return and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607636.
Gervais, S.; Lynch, A. W.; and Musto, D. K.. “Fund Families as Delegated Monitors of Money Managers.” Review of Financial Studies, 18 (2005), 11391169.
Goyal, A., and Wahal, S.. “The Selection and Termination of Investment Management Firms by Plan Sponsors.” Journal of Finance, 63 (2008), 18051847.
Hu, F.; Hall, A. R.; and Harvey, C. R.. “Promotion or Demotion? An Empirical Investigation of the Determinants of Top Mutual Fund Manager Changes.” Working Paper, Duke University (2000).
Jensen, M. C. “Risk, the Pricing of Capital Assets, and the Evaluation of Investment Portfolios.” Journal of Business, 42 (1969), 167247.
Jenter, D., and Lewellen, K.. “Performance-Induced CEO Turnover.” Working Paper, Stanford University (2010).
Khorana, A. “Top Management Turnover: An Empirical Investigation of Mutual Fund Managers.” Journal of Financial Economics, 40 (1996), 403427.
Khorana, A. “Performance Changes Following Top Management Turnover: Evidence from Open End Mutual Funds.” Journal of Financial and Quantitative Analysis, 36 (2001), 371393.
Kostovetsky, L. “Brain Drain: Are Mutual Funds Losing Their Best Minds?” Working Paper, University of Rochester (2010).
Kothari, S. P., and Warner, J. B.. “Evaluating Mutual Fund Performance.” Journal of Finance, 56 (2001), 19852010.
Kuhnen, C. M. “Business Networks, Corporate Governance, and Contracting in the Mutual Fund Industry.” Journal of Finance, 64 (2009), 21852220.
Lynch, A. W., and Musto, D. K.. “How Investors Interpret Past Fund Returns.” Journal of Finance, 58 (2003), 20332058.
Malmendier, U., and Nagel, S.. “Depression Babies: Do Macroeconomic Experiences Affect Risk Taking.” Quarterly Journal of Economics, 126 (2011), 373416.
Massa, M.; Reuter, J.; and Zitzewitz, E.. “When Should Firms Share Credit with Employees? Evidence from Anonymously Managed Mutual Funds.” Journal of Financial Economics, 95 (2010), 400424.
Newey, W. K., and West, K. D.. “A Simple, Positive, Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.
Pastor, L., and Stambaugh, R. F.. “On the Size of the Active Management Industry.” Journal of Political Economy, 120 (2012), 740781.
Sirri, E. R., and Tufano, P.. “Costly Search and Mutual Funds.” Journal of Finance, 53 (1998), 15891622.
Wahal, S., and Wang, A. Y.. “Competition among Mutual Funds.” Journal of Financial Economics, 99 (2011), 4059.
Warner, J. B., and Wu, J. S.. “Why Do Mutual Fund Advisory Contracts Change: Performance, Growth, and Spillover Effects.” Journal of Finance, 66 (2011), 271306.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 294 *
Loading metrics...

Abstract views

Total abstract views: 896 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 22nd July 2018. This data will be updated every 24 hours.