Abstract: We study the determinants of compensation for portfolio managers in the U.S. mutual fund industry using administrative data on worker-level earnings from U.S. Census Bureau. We find that the average portfolio manager’s pay is $1.76 million in 2020 dollars, and a clear skew towards the right tail of the distribution. More importantly, we document strong pay-for-performance sensitivity (PPS) in our sample. For instance, a 1% increase in average abnormal return of the past three, five, and ten years increases an average manager’s pay by 5.3%, 7.8%, and 10.3%, respectively. Furthermore, we rationalize the strong PPS we document in portfolio manager pay. Specifically, portfolio managers’ compensation shows a strong and positive correlation with the expected fee revenue that these managers generate for investment advisors via the flow-performance relationship. Overall, our paper provides the first estimate on the strength of PPS for U.S. portfolio managers and offers novel insights into the pay-for-performance paradigm in the U.S. asset management industry.
Discussant: Apoorva Javadekar, Indian School of Business
Abstract: Political beliefs shape the portfolio choice and asset demand of institutional investors. After Donald Trump’s surprise 2016 election, Republican fund managers actively increased the equity share of their portfolios by nearly two percent, primarily through purchases of stocks exposed to market fluctuations. We validate that partisan beliefs drive changes in portfolio choice using the reaction of stock analysts to the same shock. Republican analysts increased their near-term earnings forecasts following Trump’s election, especially in those stocks most exposed to market conditions. Finally, we show that partisanship has transformed the entirety of the intermediation chain. Republican and Democratic-run funds now receive systematically different inflows due to alignment between fund manager partisanship and fund sustainability ratings. Motivated by our empirical results, we build a Koijen-Yogo style model of partisan asset demand.
Discussant: Marco Ceccarelli, Vrije Universiteit Amsterdam
Leonid Kogan, Massachusetts Institute of Technology
Wei Wu, Texas A&M University
Abstract: We develop a unique dataset, the first-ever of its kind, by leveraging the US Census Bureau’s LEHD program and various big textual data sources, to examine the factors influencing the compensation and career trajectories of US active equity mutual fund managers. We find that managers’ compensation is primarily determined by assets under management (AUM), with return performance directly influencing bonuses beyond its impact on AUM. Despite not aligning with client interests, fund flows significantly affect manager compensation and career outcomes. Large fund outflows increase a manager’s likelihood of job turnover (with a substantial decline in compensation) by 4 percentage points.
Discussant: Markus Ibert, Copenhagen Business School
