Evidence that "Namesake" Mutual Funds Outperform their Peers

I came across an academic journal article highlighting the fact that Namesake Funds outperform their peers in several aspects. I thought this was interesting and has some concepts you should keep in mind when selecting an actively managed fund for long term investing in the hopes of exceeding market and peer fund returns. I've condensed 20 pages of research and tables to about a page:

This article summarizes the conflicts that could arise and the ensuing performance when comparing namesake funds to generic funds. A namesake fund is one where the fund manager sites on the board and has significant investments in the fund they manage. The “namesake” is derived from the notion that the fund or the company is generally named after such manager. An example of a namesake fund is the Baron Partners Fund (BPTRX), vs. say, AIM Moderate Growth Fund. The results show that the namesake funds are generally more tax efficient and contain a slightly higher level of unsystematic risk, while outperforming their peers.





Fund managers that are employed by the firm tend to have career concerns, whereas more tenured, famous namesake managers do not share the same concerns. For these reasons, younger managers tend to less risk and follow the crowd, whereas namesake fund managers have fewer career concerns and invest accordingly.



Given these differences, there are five main hypotheses tested for these two populations of fund managers:



1) Namesake funds should have higher fees than generic funds since the namesake fund managers exert more influence on the board and possess a large interest in the company.



2) The namesake funds should be more tax efficient because namesake fund managers typically have a larger portion of their own funds invested.



3) Since namesake fund managers have fewer career concerns, there should be a greater degree of unsystemic risk.



4) Because the namesake fund managers have more at stake with respect to their own funds, it is hypothesized that they should outperform generic funds.



5) Given these benefits and the past, more prestigious roles of the namesake fund managers, it is hypothesized that their funds have higher levels of investor cash flows.

The empirical results provide strong support for these hypotheses:



1) Expense ratios are 12-15 basis points higher for namesake funds than generic funds.



2) Namesake funds do tend to enjoy greater tax favorability than their counterparts. An interesting note here is that since fund managers are generally rated on their pre-tax returns, generic managers are not incented to control the timing or size of tax distributions, whereas namesake managers have more skin in the game.



3) The data also supports the risk assumption. Namesake funds have lower momentum beta, suggesting they do not chase returns as much as their counterparts.



4) Adjusted for all relevant factors, the namesake funds tend to outperform their counterparts by 6-9 basis points per month.



5) The namesake funds do indeed attract more investor cash flows and there is evidence that fund investors are more sensitive to the past performance of namesake funds.

There are some other key characteristics of namesake funds worth considering:

• The average tenure for namesake fund managers is 6.6 years, which is 1.8 years longer than their counterparts.


• On average, namesake funds hold 8.4% of assets in cash, whereas generic funds hold 6% in cash.


• The turnover of namesake funds in the same class is much lower at 50% compared to 81%.
  

In summary, while I believe excluding some rather unique investment objective you simply can't find anywhere else, you're best investing in index funds, there may be occasions where investors are driven toward actively managed funds. In this scenario, one is well served by first considering a namesake fund over a generic fund given the preponderance of data highlighting the benefits on an aggregate basis.





Source:


Ferris and Yan (2007) “Agency conflicts in delegated portfolio management: Evidence from namesake funds”

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