Herding and Delegated Portfolio Management: The Impact of Relative Performance Evaluation on Asset Allocation

Ernst Maug () and Narayan Naik ()
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Ernst Maug: University of Mannheim, Germany
Narayan Naik: London Business School, United Kingdom

Quarterly Journal of Finance (QJF), 2011, vol. 01, issue 02, 265-292

Abstract: This paper investigates the effect of fund managers' performance evaluation on their asset allocation decisions. We derive optimal contracts for delegated portfolio management and show that they always contain relative performance elements. We then show that this biases fund managers to deviate from return-maximizing portfolio allocations and follow those of their benchmark (herding). In many cases, the trustees of the fund who employ the fund manager prefer such a policy. We also show that fund managers in some situations ignore their own superior information and "go with the flow" in order to reduce deviations from their benchmark. We conclude that incentive provisions for portfolio managers are an important factor in their asset allocation decisions.

Keywords: Herding; mutual funds; delegated portfolio management (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (21)

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DOI: 10.1142/S2010139211000092

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