An Analysis Of The Relationship Between The Mutual Fund Family And Member Fund's Performance

Most researches on the performance of mutual fund treat fund as an independent entity. As the agent, the fund manager works for the principle-the mutual fund holders. In this paper, I view mutual fund performance from a different perspective than the majority of the existing literatures in China. Instead of treating a mutual fund as a completely independent entity, I view it a part of a larger group, the mutual fund family. Given this dependence, differences might arise between the objectives of the fund and the family it belongs to. The fund manager works for maximizing the profit of the mutual fund family, not for maximizing the interest of the fund holders. If we want to know the factors which will affect the performance of mutual fund and the behavior of mutual fund, we can not limit our research on the mutual fund itself; we should analyze the influence of mutual fund family on the mutual fund's performance.In the beginning of the paper, I set up a model to analyze the role of mutual fund family on solving the asymmetric information problem between the fund manager and the fund holders. I show that if the mutual fund family commits to fire a fixed amount of fund managers at the end of each period, the fund holders will be more confident on the investment ability of the fund managers who are rehired.Based on the market-adjusted performance model, the linear probability model and the standard mutual funds performance persistence methodology, I run several empirical tests on the influence of mutual fund family on the performance of mutual funds and show that:1. I first document that fund returns before fees and expenses, decline with lagged fund size. I then explore a number of potential explanations for this relationship. These adverse scale effects are related to liquidity. Controlling for its size, a fund's return does not deteriorate with the size of the family that it belongs to, indicating that scale need not be bad for performance depending on how the fund is organized.2. I examine whether mutual fund family affect the performance of the funds they manage. From a sample of funds belonging to large families we find that last year's best performing funds outperform last year's worst performing funds by 135 basis points.3. I also show that there exists persistence of performance of these funds inside their respective families. From a sample of funds belonging to large families we find that a portfolio of last year's best performing funds outperform a portfolio of last year's worst performing funds by 130 basis points. The persistence in the performance difference between the mutual funds belong the same mutual fund family is significant and robust to the empirical specifications. I view the findings as an evidence of mutual fund family strategically transfer performance across member funds to favor those more likely to increase overall family profits.I investigate the incentive of strategically transfer performance across member funds. The rationale behind such a strategy follows from both the convexity of the performance-flow relationship and flow spillovers inside the family. And I provide some evidence to show that the member funds of mutual fund family usually hold the same stocks and try to influence the stock price. And the records of cross-trades between members of mutual fund family can partly explain the performance transfer strategy of mutual fund family.