Hiding in Plain Sight: The Global Implications of Manager Disclosure

Delegated asset management, and mutual funds in particular, have become the investment vehicle of choice for retail investors in capital markets worldwide. At the end of 2020, open-end mutual funds had a total of $63 trillion in assets under management globally, and almost half of all U.S. households owned shares of a mutual fund (2021 Investment Company Fact Book).

While there are clear benefits to professionally managed and diversified investment funds, the potential for agency conflicts have long been a concern. Historically, financial regulators have relied on disclosure requirements for funds as the solution to these potential conflicts. In the aftermath of the Great Depression, the disclosure of material details about investment companies was the main focus of the Investment Company Act of 1940. More recently, following the Global Financial Crisis, the Dodd-Frank Act in the U.S., the Markets in Financial Instruments Directive (MiFID II) in Europe, and other regulatory initiatives worldwide focused on increased disclosure in all aspects of the financial industry.

Given the regulatory push on disclosure, it is surprising that 17 percent of mutual funds outside the U.S. do not disclose the name of their portfolio-management team members. In our paper, Hiding in Plain Sight: The Global Implications of Manager Disclosure, we study the implications of anonymously managed funds on equity mutual fund performance and manager behavior to better understand the motivations behind keeping portfolio managers anonymous. Using one of the most comprehensive databases of global mutual funds, we examine the composition of their management teams over a 20-year period in a sample that includes almost 30,000 equity open-end equity mutual funds in 32 countries.

Anonymous fund managers have been relatively rare in North America since a 2004 SEC rule change required U.S. domiciled mutual funds to disclose the name of all portfolio managers (and only represent 3 percent of the assets under management (AUM) of Canadian funds). In Europe, however, there is a large variation, with between 18 percent and 43 percent of AUM being anonymously managed in Germany and Switzerland while only less than 5 percent of AUM in Nordic markets or France. We also observe differences across Asia, with anonymous management prevalent in Singapore but largely nonexistent in South Korea.

In our global sample, we show that  funds with anonymous managers underperform those with named managers. Further breaking down these results by regions, we find that this underperformance holds if we look separately at the North American or European subsamples. By not naming the portfolio manager(s), management investment companies (“fund families”) effectively take credit for their funds’ performance and possibly reduce the incentive for the managers to exert an optimal level of effort. To examine this possibility, we employ common measures of manager effort and ability such as “active share” (i.e., how much a fund’s portfolio differs from its benchmark index) and show that the under-performance of anonymous funds is driven by these managers being less active in their investment decisions.

Anonymous management varies considerably across investment adviser characteristics, including where the fund is domiciled. Starting at the fund-family level, we find that small-AUM families, those with a more cooperative incentive structures, and bank-affiliated entities are more likely to have anonymous managers. Conversely, anonymous management is less frequent in countries with more disclosure requirements in securities markets and those that rank higher on the Hofstede individualism scale. Additionally, we repeat our main performance tests after controlling for these additional family- and country-level factors and find that the underperformance of anonymous funds still remains statistically significant.

As mentioned earlier, in 2004, the SEC introduced a new rule that required fund families to disclose biographical information of the portfolio management team. Using this disclosure event, we are able to study the U.S. funds that had anonymous managers prior to the rule and were thus forced to name their managers following the regulatory change. We find that anonymously managed funds underperform across both the pre- and post-regulation period, but that their performance increases significantly once the managers are named. Further, using the same portfolio activity measures, we show that this increase in performance is likely due to fund managers becoming more active once they are named. This evidence suggests that the naming has a positive impact on portfolio managers’ effort, and, in turn, this results in fund performance improvements.

While much of our focus is on the portfolio manager, it is also important to understand how investors perceive anonymous management. If investors view funds with unnamed managers less favorably, then the continued prevalence of anonymous teams would be even more surprising. In our final test, we show that after controlling for fund performance, the net flows to anonymous funds are not different from flows to funds with named managers, consistent with investors not distinguishing between named and anonymously managed funds.

With regards to the academic literature, our paper makes two important contributions. First, we contribute to the literature on mutual fund structures and the presence of agency conflicts. By providing the first global study of anonymous fund management, we identify an additional source of agency cost in delegated asset management. We show that the simple decision to disclose the portfolio managers’ identities can provide powerful incentives for better fund performance.

Finally, our paper has policy implications for regulators worldwide. Where asset managers are likely to push back against increased disclosure requirements, disclosing the name(s) of the portfolio manager(s) is a simple act that can better align the incentives of the manager(s) and the investor. Using the U.S. as a laboratory, we provide evidence that a better disclosure regime can have a positive impact on fund performance and manager effort.

This post comes to us from professors Michael Young at the University of Missouri at Columbia, Richard B. Evans at the University of Virginia’s Darden School of Management, Miguel A. Ferreira at the Nova School of Business and Economics, and Pedro Matos at the University of Virginia’s Darden School of Management. It is based on their recent paper, “Hiding in Plain Sight: The Global Implications of Manager Disclosure,” available here.

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