Institutional Investors and Mutual Fund Governance: Evidence from Retail – Institutional Fund Twins

Some investment advisors offer multiple versions of a fund with the same manager and highlycorrelated returns. But these “twin” funds are separate portfolios for different investors withdiffering abilities to select and monitor managers. Using a matched sample of retail andinstitutional twin funds, we investigate whether retail investors benefit from investing alongsidetheir institutional counterparts. We find that retail funds with an institutional twin outperform by1.5% risk-adjusted annually. We demonstrate that institutional twin investors are more sensitiveto high fees and poor risk-adjusted performance than retail investors. We analyze whether thedifference in sensitivities can help explain the better performance by focusing on changes to feesand portfolio composition of retail funds after the creation of an institutional twin. We find thatafter the institutional twin is created, retail investors benefit from lower turnover, reducedexpenses and greater managerial effort consistent with the reduction of agency problems fromgreater monitoring.[...]