Ben Naim and Sokolinski found a larger effect of fund size on manager pay -- about 30 percent, or roughly twice the size of what Ibert et al. found. Furthermore, they found that managers captured 40 percent of the fee revenue that comes from investors putting more money in the fund (rather than increases in size that come from market returns, or from the company handing the manager more assets to manage).
These findings suggest that mutual-fund managers are paid less for beating the market than for marketing -- i.e., the ability to collect assets. High passive returns, even if they aren’t due to skill, attract new investor money, which gets the company more management fees. And when more investor money comes in, managers get rewarded.
This bolsters the notion of “money doctors” -- the idea that managers mainly add value by building trust with investors. Investors are naturally wary about putting their money in stocks and other risky assets, and want a qualified professional to tell them it’s safe to do so. This could potentially be a win-win relationship; investors pay fees, but get higher returns than they would if they had stayed out of the market. Or it could be a potentially toxic relationship, if managers use personal or cultural affinity to sell investors on a bad deal. More research is needed in order to tell how many money doctors are really quacks.
But the new research into fund-manager pay also shows that a large percentage of compensation remains unexplained, having apparently little to do with fund size or returns. There is a lot of money sloshing around in the financial industry, and much of how it gets divvied up remains a mystery.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
This column was provided by Bloomberg News.