TIAA-CREF to Examine Ownership of Funds by Directors: Upcoming Study Will Also Look at Revenue Sharing's Impact on Performance
February 14, 2005
While the mutual fund industry wrangles with the upcoming independent chairman rule, TIAA-CREF has commissioned a study that will look at two other fund governance issues that have escaped regulators' attention: whether ownership of a fund by directors improves performance and whether revenue sharing lowers it.
Qi Chen, an assistant professor of business administration at Duke University, and Wei Jiang, an assistant professor of finance and economics at Columbia University, plan to pore through the statements of additional information (SAIs) in more than 1,200 fund prospectuses to learn more about the effects of fund ownership by directors and whether aggressive mutual fund growth comes at the expense of fund returns.
Although their study is still in its earliest stages, the scholars hope to provide TIAA-CREF with preliminary results in the next six to eight weeks. They'll then publish portions of the results in papers for academic journals throughout the year. By year-end, Chen and Jiang will deliver their full findings to TIAA-CREF for the pension giant to share with the industry. The scholars expect that their research will be useful for policymakers and industry professionals. The scholars said they are motivated by two particular facts about compensation in the mutual fund industry. First, while the effects of fund ownership by portfolio managers has been studied previously and funds will have to display this as well as portfolio manager compensation structures starting Feb. 28, very little information exists on ownership of funds by directors or whether higher ownership improves performance.
Second, since an investment advisor's compensation is determined by a fund's returns as well as assets under management, the scholars think a potential conflict of interest exists because the manager may wish to grow the fund through preferential marketing, even if those expenses raise fund fees and, therefore, lower returns on assets.
In short, their ultimate goal is to shed light on the exact nature of conflicts of interest in the mutual fund industry and how those conflicts affect individuals and their financial security.
The professors also plan to look at ownership trends among directors, such as, whether members of the board who work at the investment advisor own more fund shares than the independent directors, and whether directors "hold more shares among no-load or load funds, high-turnover funds, or index funds versus non-index funds. This is what we call a holding pattern," Jiang explained.
The scholars harvested their SAI sample by visiting fund Web sites and calling the funds' toll-free numbers. That data will be merged with addition information on returns, fund assets, annual turnover, fund inflows and other control variables from fund tracker Morningstar. Among the controls is whether management style is passive or active, whether a fund is growth- or value-oriented or tilted toward a specific sector, as well as a fund's size and age and how that impacts a manager's demand for marketing. Jiang and Chen, who will use regression analysis to draw their conclusions, will also investigate the impact of independent directors on fund returns.
Interestingly, Jiang and Chen are not focusing on the hotly debated issue of independent chairmen. Jiang said the omission is because, much like the mutual fund industry itself, academics are struggling with the definition of "independent." For example, a number of independent chairmen who have already been appointed are closely linked, either personally or professionally, to the sitting board chairman. Jiang thinks the industry might wrestle with a similar dilemma if regulators choose to make inside ownership mandatory.
"Exactly how do you define the ownership requirement?" she asked. "Does every director have to own shares, or maybe at least one director has to own shares, or an independent director has to own shares? I think these [issues] are related."