Managerial incentives and effort substitution in concurrent mutual fund management

This study examines how managerial incentives influence managerial effort allocation between newly issued and incumbent mutual funds under a multitask principal-agent framework. Our theoretical analysis demonstrates that higher expected flow-to-effort sensitivity for new funds encourages managers to allocate more attention to them. To evaluate these insights empirically, we adapt the active share to create a modified active share metric, which measures the divergence in portfolio holdings between newly issued and incumbent funds managed by the same manager. This metric serves as a proxy for effort substitution by capturing the degree to which the new fund’s strategy departs from the incumbent’s. We find that a greater differential in flow-to-performance sensitivity between the two funds is associated with higher modified active share, indicating a more pronounced managerial focus on new funds. The results illustrate the direct connection between incentives and managerial behaviour and shed light on practical implications for contract design, underscoring the strategic importance of new funds in driving fund industry growth.