Team leaders can foster one of two broad corporate cultures in their efforts to improve performance: collaboration or conflict. So should employees work together to achieve results, or strive against each other in a more Darwinian environment encouraging individual excellence?
In a new study, Richard Evans of the University of Virginia and Melissa Porras Prado and Rafael Zambrana of the Nova School of Business and Economics in Portugal investigated the impact of these dynamics in the fund-management industry. They began by examining whether fund groups incentivized their managers to work co-operatively or competitively: did managers work in teams, for example, or were they driven to compete by having their compensation closely tied to their individual performance?
The academics applied these tests to a wide range of actively managed US mutual funds spanning the domestic and international equity, bond and balanced-portfolio sectors between 1992 and 2015. They drew on both the Center for Research in Security Prices Survivor-BiasFree Mutual Fund Database and information from the funds’ own SEC filings.
Families stick together
Evans, Porras Prado and Zambrana looked first at two ways in which fund families cross-subsidize their strategies: by trading with each other and by investing in each other. These two techniques can help manage liquidity in portfolios and were typically employed by firms that scored more highly for co-operative behaviors.
Moving one standard deviation higher in cooperative incentives was found to boost crosstrading by 0.11% and lift cross-family holdings by 4.4%. On the other hand, an increase of one standard deviation in a group’s competitive incentives reduced crosstrading by 0.18% and cut funds’ cross-family holdings by 4.3%.
Encouragingly, that makes intuitive sense. But is a fund’s performance better served by a friendly or more antagonistic spirit at its firm?
Broadly, competitive families delivered more highly dispersed performances from their funds, while the performance of co-operative groups was more synchronized. A one standard deviation increase in competitive incentives raised the standard deviation of funds’ objective-adjusted returns by 16.2%; the equivalent tilt towards co-operative incentives lowered dispersion between returns in a family’s funds by 4.8%.
However, this did not mean the performance of funds from harmonic houses was necessarily better; it was simply more standardized. Indeed, competitive firms were more likely to produce funds with higher returns. The average fund in a competitive family outperformed the average fund in the sample by 0.3% per month.
The researchers also considered whether competitive groups were more likely to spawn ‘star’ funds, defined as those in the 95th percentile of their category. They discovered that they were, with firms yielding 0.3% more star funds with every one standard deviation increase in their net competition incentives.
Institutionalizing the competitive instinct
Evans, Porras Prado and Zambrana declined to specify which groups they identified as competitive or co-operative, but did elaborate on their likely profiles.
‘We posit that competitive investment advisors are more likely to have institutional clients,’ they argued. ‘Within competitive investment advisors, the signal about each manager is clearer since we find that information sharing is discouraged and the reward for exerting effort is greater in such families.
'Moreover, since such institutional investors have lower search costs and greater ability to discern talented investors, the competitive compensation model would be ideal for investment advisors hoping to attract institutional assets.’
Conversely, it makes more sense for retail buyers to opt for co-operative firms where there is less dispersion among funds. ‘If retail investors are less able to identify skilled managers, choosing a fund from a co-operative family will result in higher performance on average and lower risk,’ the authors explained.