The More Things Change, The More They Stay the Same : Why Do Mutual Funds Change Sub-advisors?

We study the effects of managerial turnover and competition on U.S. sub-advised mutual funds (MFs), using changes of sub-advisors by 426 funds from January 1995 to December 2016. Sub-advised MFs exhibit return-chasing behaviour when making turnover decisions, but these changes neither improve subsequent fund returns and risk measures nor increase future flows into the fund. Using sub-advisor turnover to change the degree of competition among sub-advisors does not affect the performance of incumbent sub-advisors. Overall, there is no evidence that sub-advisor selection decisions by fund families benefit sub-advised MF's performance. Outperforming sub-advisors with larger style drift are less likely to be hired, and the more a sub-advisor deviates from its investment mandate, the more likely it is to be fired