Richard Evans

University of Virginia | UVa · Darden School of Business

We examine team diversity and performance in the asset management industry through the lens of identity. Focusing on political ideology as the relevant dimension of identity, we find that diverse teams outperform homogeneous teams. The mechanism involves both improved decision making due to more diverse perspectives and increased monitoring by hete...

We examine the role of peer (e.g., Lipper manager indices) versus pure (e.g., S&P 500) benchmarks in fund manager compensation. We model their impact on manager incentives and then test those predictions using novel data. We find that 71% of managers are compensated based on peer benchmarks. Consistent with the model, peer-benchmarked fund managers...

Prior research suggests that nonfundamental exchange-traded fund (ETF) price shocks are transmitted to their portfolios through an arbitrage mechanism. We test this proposition by examining minute-by-minute returns and order imbalances but find little evidence that ETF trading impacts underlying returns. Specifically, panel vector autoregression sh...

The short-selling of exchange-traded funds (ETFs) creates "phantom" ETF shares, trading at ETF market prices, with cash flows rights but no associated voting rights. Unlike regular ETF shares backed by the underlying securities of the ETF and voted as directed by the sponsor, phantom ETF shares are backed by collateral that is not voted. Introducin...

Using manager compensation disclosure and intra-family manager cooperation measures, we create indices of family-level competitive/cooperative incentives. Families that encourage cooperation among their managers are more likely to engage in coordinated behavior (e.g., cross-trading and cross-holding) and have less volatile cash flows. Families with...

The dramatic increase in the percentage of mutual funds lending equities suggests that lending fees are an increasingly important source of income for investment advisors. We find that funds that lend equities underperform otherwise similar funds in spite of lending income. The effect of lending is concentrated in funds that cannot act on the short...

While ETFs constitute just under 10% of U.S. equity market capitalization, they account for over 20% of short interest and nearly 79% of failures-to-deliver in U.S. equities. While the disproportionate share of short activity in ETFs has raised concerns about excessive shorting and naked short-selling, we identify an alternative cause for this acti...

With detailed product- and firm-level data for mutual funds, we study why mutual fund families relinquish control of fund management (advising) and outsource to non-affiliated entities and why those entities agree to manage for the fund family. Fund families and fund advisors cannot write enforceable contracts over the return earned by the fund (ta...

The dramatic increase in the percentage of mutual funds lending equities suggests that lending is an increasingly important source of income for investment advisors. However, borrowing demand for equities is a strong signal of future underperformance. We find that funds that lend equities underperform otherwise similar funds in spite of lending inc...

Industry observers have long warned of the "invisible" costs of fund trading, yet evidence that these costs matter is mixed because many studies do not account for the largest trading-cost component—price impact. Using portfolio holdings and transaction data, the authors found that funds' annual trading costs are, on average, higher than their expe...

A securities lending program offers a unique opportunity for mutual funds to generate additional income. By lending the securities in their portfolio, funds can earn both interest and appreciation on the collateral of loaned securities. According to Data Explorers, mutual funds earned almost $1.5 billion in equity lending income in 2008. While the...

Advisors often manage multiple versions of a fund. These “twins” have the same manager and similar performance but are sold to different investors with differing abilities to select and monitor managers. Comparing investor flows in retail and institutional twins, we find that institutional investors are more sensitive to high fees and poor risk-adj...

A mutual fund board’s decision to approve an equity lending program entails an important trade-off. While equity lending can generate additional income for shareholders, it also enables the short-selling of stocks owned by the fund, which could negatively impact stock prices and fund performance. We empirically examine this trade-off using a sample...

We ask whether mutual funds’ flows reflect the incentives of the brokers intermediating them. The incentives we address are those revealed in statutory filings: the brokers’ shares of sales loads and other revenue, and their affiliation with the fund family. We find significant effects of these payments to brokers on funds’ inflows, particularly wh...

A mutual fund board’s decision to approve an equity lending program entails an important trade-off. While equity lending can generate additional income for shareholders, it also enables the short-selling of stocks owned by the fund, which could negatively impact stock prices and fund performance. We empirically examine this trade-off using a sample...

Studies examine the relation between mutual fund performance and trading cost using a variety of proxies - the most common being portfolio turnover. Overall, the evidence is consistent with informational equilibrium, i.e., trading has zero net impact on performance. We offer an alternative explanation, that common trade cost proxies lack statistica...

We investigate whether mutual fund retail investors benefit from investing in mutual funds whose managers also offer a similar, but separately managed, institutional mutual fund. Using a sample of twin retail and institutional funds, we show that institutional investors are better than retail investors at evaluating fund performance, using metrics...

This study provides empirical evidence on the role of disclosure in resolving agency conflicts in delegated investment management. For certain expenditures, fund managers have alternative means of payment which differ greatly in their opacity: payments can be expensed (relatively transparent); or bundled with brokerage commissions (relatively opaqu...

This study provides empirical evidence on the role of disclosure in resolving agency conflicts in delegated investment management. For certain expenditures fund managers have alternative means of payment which differ greatly in their opacity: payments can be expensed (relatively transparent); or bundled with brokerage commissions (relatively opaque...

We examine the optimal portfolio choices of young and old fund managers in a calibrated dynamic life-cyle model of the active manager’s investment problem. The optimal policies of any manager depend on age, the wealth to labor income ratio, the value of the manager’s private information, and recent past performance relative to the benchmark. While...

This case examines the importance of forecasting expected returns in asset allocation decisions. While the case is targeted to MBA students in an investments or portfolio managment course, it is also appropriate for an advanced undergraduate course. It is written from the perspective of a new employee at a small investment management firm that was...

The owner of a small financial services firm is evaluating the performance of four funds to determine whether to offer them to his clients. The funds span a variety of objectives and include a recently initiated fund. The case explores issues related to the evaluation of mutual fund performance, including the selection of benchmarks and the effect...

This case examines the importance of liquidity to financial markets, using the dramatic volatility of mutual fund flows in 2008 as an example. While the case is targeted to MBA students in an investments or portfolio managment course, it is also appropriate for an advanced undergraduate course. It is written from the perspective of a fund manager w...

This technical note provides a simple, yet powerful, optimization exercise to demonstrate the benefits of diversification in a portfolio and the importance of asset allocation. While the note is targeted for MBA students in an investments or portfolio management course, it is also appropriate for an advanced undergraduate course.

I propose to study the costs and benefits of dual management of retail and institutional assets using a unique sample of investment portfolio twins. The sample consists of matched pairs of retail and institutional portfolios with the same manager, investment objective and name. Using these matched pairs I can examine both the differences in investo...

Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. A part of the value of failing passes through to options prices: when failing is cheaper than borrowing, t...

Incubation is a strategy for initiating new funds, where multiple funds are started privately, and, at the end of an evaluation period, some are opened to the public. Consistent with incubation being used by fund families to increase performance and attract flows, funds in incubation outperform nonincubated funds by 3.5% risk-adjusted, and when the...

We examine several hypotheses regarding mutual-fund commission payments using data from N-SAR filings. Consistent with an information motive, relatively active funds pay higher excess commissions, and these 'soft dollar' payments are associated with improved return performance. However, excess commissions are also related to an expense-shifting mot...

We study the roles of traditional governance (boards, sponsors, etc.) and market governance (investors voting with their feet) in mutual funds and variable annuities. We find that market governance is less pronounced for variable annuity investors. Using a matched sample of variable annuity-mutual fund twins, we find that variable annuity investors...

We study the relative importance of market governance and non-market governance in retirement investments using a sample of variable annuities. Variable annuity investors are significantly less sensitive to performance and fees than mutual fund investors. Consistent with a complementary role of market and non-market governance, other governance mec...

Berk and Green (2004) argue that investment inflow at high-performing mutual funds eliminates return persistence because fund managers face diminishing returns to scale. Our study examines the role of trading costs as a source of diseconomies of scale for mutual funds. We estimate annual trading costs for a large sample of equity funds and find tha...

This paper documents the magnitude and extent of the incubation bias in the CRSP mutual fund database. For a sample of aggressive growth, growth and income and long-term growth funds with inception dates on or after January 1st, 1996, 44% of funds are incubated. Comparing an age-matched sample of incubated and non-incubated funds, the difference in...

We study the relative importance of market governance and board governance in financial mutuals using a matched sample of mutual funds and variable annuity funds with the same manager, very similar portfolio holdings, and high return correlation. We show that variable annuity fund investors exercise little market governance. Fund flow into variable...

Retail investors often lack investment expertise. Mutual-fund brokers can help, but their incentives are mixed so it is an empirical question what value they add, both for consumers and for fund families. Investors pay more to invest through unaffiliated brokers than captive brokers, and while unaffiliated brokers add more value to redemptions, cap...

The assumption that market participants risk-adjust when measuring performance is common in finance. However, empirical research has shown that raw returns play an important role in retail investment decisions. As financially sophisticated investors, fund management companies understand the importance of risk-adjustment, but because their profits d...

Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. Some of the value of failing passes through to option prices: when failing is cheaper than borrowing, the...

Existing empirical evidence of career concerns in mutual fund management actually confounds concerns about future labor income risk with the fact that younger managers are also learning about the value of their private information. We examine the implications of career concerns, separate from learning, in a calibrated dynamic model of the active fu...

Regulators have worried since the early days of mutual funds that the advice of mutual-fund brokers is distorted by their incentives. We test for this distortion by relating the incentives arising from brokers' affiliation and compensation to the flows passing through them. We find that flows through unaffiliated brokers bias toward the funds givin...