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Common Set of Directors Across Funds a “Mixed Blessing”

A recent paper examines the ubiquitous practice of a common set of directors serving at the board for multiple funds in a complex and finds the structure to be a “mixed blessing.” The authors specifically examined actively managed mutual funds for the year 2007, a dataset that yielded “3,948 funds that have 11,598 individual fund-classes and belong to 328 mutual fund families.” The authors found that expense ratios, management fees, and overall fees show no correlation to the degree of “director overlap.” Looking at performance, the authors found that “[g]ross returns are positively associated with director overlap, whereas evidence is mixed for net returns” but found “no significant relationship between fund alphas and board structure.” Lastly, the study found that those funds with greater director overlap had a lower “return gap,” or the difference between the fund’s actual performance and the fund’s expected performance based on the its previously disclosed portfolio.

On the negative side, the study found that fund families with greater board overlap are more likely to “strategically transfer performance across member funds to favor funds that generate the most fees.” According to the authors, this may occur “through the fund family coordinating purchases and sales of investments made by particular funds to boost the performance of high fee funds (cross trading), and also when a fund family allocates hot initial public offering (IPO) stocks differentially to the high fee funds under its umbrella.”

Additionally, the authors found that funds with a higher degree of director overlap tend to have higher 12b-1 fees and are more likely to engage in “window dressing,” or “tilt[ing] portfolio holdings towards winner stocks and away from loser stocks right before the portfolio disclosure dates in order to give investors a false impression of stock picking ability.”