scholarly journals Governance and Shareholder Value in Delegated Portfolio Management: The Case of Closed-End Funds

2012 ◽  
Author(s):  
Youchang Wu ◽  
Russ R. Wermers ◽  
Josef Zechner
Keyword(s):  
Portfolio Management ◽  
Shareholder Value ◽  
Closed End Funds ◽  
Delegated Portfolio Management

Herding and Delegated Portfolio Management: The Impact of Relative Performance Evaluation on Asset Allocation

2011 ◽  
Vol 01 (02) ◽  
pp. 265-292 ◽  
Author(s):  
Ernst Maug ◽  
Narayan Naik
Keyword(s):  
Performance Evaluation ◽  
Portfolio Management ◽  
Asset Allocation ◽  
Relative Performance ◽  
Optimal Contracts ◽  
Fund Managers ◽  
Portfolio Managers ◽  
Delegated Portfolio Management ◽  
The Impact ◽  
Allocation Decisions

This paper investigates the effect of fund managers' performance evaluation on their asset allocation decisions. We derive optimal contracts for delegated portfolio management and show that they always contain relative performance elements. We then show that this biases fund managers to deviate from return-maximizing portfolio allocations and follow those of their benchmark (herding). In many cases, the trustees of the fund who employ the fund manager prefer such a policy. We also show that fund managers in some situations ignore their own superior information and "go with the flow" in order to reduce deviations from their benchmark. We conclude that incentive provisions for portfolio managers are an important factor in their asset allocation decisions.

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