To Group or Not to Group? Evidence from Mutual Funds
The literature has conflicting reports regarding the impact of group decision making on performance. We first observe that in mutual fund studies this results from large discrepancies in reported managerial structures between CRSP and Morningstar databases reaching on average 20% per year. Then we show that with more superior Morningstar data team-managed funds exhibit higher risk-adjusted returns than single-managed funds. The performance spread is present across all fund categories, except aggressive funds, and is robust to the inclusion of fund- and manager-level controls. Across various managerial structures, the largest team-induced gains are reached among funds managed by three individuals. Furthermore, teams significantly improve fund performance when funds are located in financial centers, reflecting larger networking potential and/or better skills of people who reside in larger cities. This improvement is achieved in teams more homogeneous in age and education. In spite of higher returns however, team-managed funds are not riskier than single-managed funds in terms of market exposure or idiosyncratic volatility. Finally, team-managed funds trade less aggressively and are able to generate extra inflows for their funds. Thus, collective decision making is beneficial, but its scale depends on team size and diversity as well as its geographic location.
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