Fund manager experience, reputation, and investment behavior: Evidence from mutual funds’ investment strategies and portfolio holdings

This thesis studies the effect of experience and reputational concerns on mutual fund managers’ investment behavior. I argue that fund managers face differing career incentives and challenges, such as employment risk, depending on how experienced and well established they are. I hypothesize that a combination of reputational concerns and implicit incentives leads inexperienced fund managers to invest differently than their experienced counterparts. The objective of the thesis is to study how career and reputational concerns are related to various fund and portfolio characteristics. My primary data source is the CRSP Survivor-Bias-Free Mutual Fund Database. The sample includes 2,104 actively managed U.S. equity mutual funds over the period from January 1992 to December 2016. I use two measures of fund manager experience as a proxy for career and reputational concerns. First, I measure experience as the length of time that managers have been managing their funds, which I refer to as tenure. Second, I hand-collect data on when the fund managers first appear in the fund management industry, and I construct an alternative measure of experience that proxies each manager’s total investment career experience. I provide several key findings, including some which are not documented in prior literature. To begin with, less experienced managers are more likely to follow investment strategies with less unsystematic risk, suggesting a tendency to herd. Specifically, managers with less experience in their funds tend to have a higher exposure to market risk compared to more experienced managers, and this tendency remains consistent even in periods when the market performs poorly. Furthermore, inexperienced managers prefer investment strategies with more negatively skewed return profiles, particularly momentum. By contrast, the more (less) experienced managers are, the more they incline towards a value-oriented (growth-oriented) investment style. These tendencies are also reflected in several ways in the portfolio compositions of funds. In particular, inexperienced managers tend to hold stocks with higher betas, larger market capitalizations, lower book-to-market ratios, as well as higher one-year and long-horizon past returns in their portfolios. Finally, I show that the differences in investment behavior between inexperienced and experienced managers are more pronounced following a recent market downturn. The results are largely robust to alternative specifications and to using an alternative measure of manager experience. Total investment career experience appears to have a similar effect on investment behavior as fund-specific tenure