Human Capital and the Structure of the Mutual Fund Industry

Production functions necessarily play a significant role in determining an industry’s ultimate organization. In the mutual fund industry human capital is one of the primary inputs and thus one would expect the industry’s structure to work towards its optimal use. This paper shows that the efficient allocation of human capital helps to explain the existence of mutual fund families as well as and the number and quality of managers assigned to various portfolios in a family and the resources the family devotes to a particular sector. Empirically, it appears the industry has arranged itself so that talented managers can stand out by running funds where: (1) the competition is thin enough that financial research is likely be improve performance by enough to be noticeable, (2) the fund family’s marketing arm can publicize good performance to a degree that it attracts new capital and (3) where a family has committed above average investment research resources. As a result we find that fund families exist in part to allocate talented managers into areas with superior support systems that a standalone operation cannot easily duplicate.

Download Spiegel's paper