Christine W. Lai

Effort Substitution and Performance Shift of Multi-Tasking Mutual Fund Managers

We examine performance shift and managerial effort substitution for the practice of multi-tasking in the mutual fund industry. Using the pairing of newly issued and incumbent funds under concurrent management, we show that fund managers shift performance from incumbent funds to newly issued funds. Such outperformance of newly issued funds relative to incumbent counterparts can be attributed to managerial effort substitution. In order to examine managerial effort substitution, we compare the portfolio holdings of a newly issued fund that differ from the holdings of its incumbent counterpart and use the difference as a proxy for managerial effort substitution. We decompose the difference into three components: The same stocks as in the incumbent fund but with deviating portfolio weights, newly selected stocks that are not included in the incumbent fund, and old stocks that are included in the incumbent fund but not in the new fund. The empirical results indicate that the outperformance of newly issued funds against their incumbent counterparts can be attributed to the selection of new stocks in newly issued funds. Furthermore, we find that incentives embedded in the marginal impact of managerial effort on performance measures can help explain effort substitution and resulting performance shift. Overall, the results support the prediction of our multi-task principal-agent model.

Analysing the c-minus-age strategy for life-cycle investing

The c-minus-age strategy is a popular strategy for life-cycle investing. When applying the c-minus-age strategy, an investor first chooses an indirect preference parameter c and at age t will hold a percentage of c minus t in equity assets. In this article, we use a linear and a multiplicative mean-variance utility function to quantitatively analyse the term structure of the mean-variance tradeoffs implied by the c-minus-age strategy. We also provide an optimal procedure to determine c, based on the two direct preference parameters, elicited from an investor, of a multiplicative mean-variance utility function.