Fund Flows and Asset Valuations of Bond Mutual Funds: Effect of Side-by-Side Management

We compare fund flows and asset valuations of bond mutual funds whose managers concurrently manage portfolios with performance-based fees and those whose managers do not. We find that bond mutual funds whose managers concurrently manage portfolios with performance-based fees receive less fund flows and overstate their asset values. The reduction in fund flows and overstatement of fair values are amplified when these mutual funds underperform their peers. The overstatement of fair values is also amplified when these funds exhibit redemption risk. Our findings suggest that conflicts of interest associated with side-by-side management in mutual funds result in adverse operational and reporting outcomes besides underperformance.& COPY; 2023 Elsevier B.V. All rights reserved.

Automated summary

This study finds that bond mutual funds whose managers concurrently manage portfolios with performance-based fees receive lower fund flows and overstate their asset values compared to those whose managers do not. The reduction in fund flows and overstatement of fair values are amplified when these funds underperform their peers. The overstatement of fair values is also increased when these funds exhibit redemption risk. The findings suggest that conflicts of interest associated with side-by-side management in mutual funds result in adverse operational and reporting outcomes besides underperformance.